OK, here’s what I think:
There is a price level at which dramatic changes in consumption will begin significantly suppressing demand. I don’t know what that number is. We have already cut back on RV trips and we bought a hybrid in January. But that’s not the type of change I’m talking about.
Maybe at $10 a gallon I mothball the RV and make do with one car instead of two and only use it when I can’t get where I’m going without mass transportation. Maybe trucking companies will piggyback everything when diesel hit $10 and only use their trucks for local delivery.
But even if that happens all over the U.S. and we cut consumption by 50% it probably won’t be enough. Foreign countries will have to reach the point where they stop subsidizing the cost of oil for their citizens. When that, and a lot of other sensible conservation and good fiscal policy decision are made, we will see the influence of reduced demand.
That’s one way it could happen, but there is also the chance that somewhere in the not too distant future average investors begin thinking that oil futures are a great way to get rich quick. When everybody starts to believe that, and we all bet the majority of our 401K’s on oil futures, two things will happen. First, there will be a significant, short term increase in the price of oil futures. Then the second phase begins: the speculators who started the run up start to harvest their yields by dumping everything they have into the 401K market. When the 401K investors realize what’s happening they panic and oil futures take a precipitous drop to say $8.00 a barrel. It will make the dot com bust look like a picnic.
So, do what you can to conserve, but also tell everybody you know to buy oil futures.
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