Energy Prices-Where to from here?

I'm on record (March, 2007)that I expect oil prices to remain in the $50-75 range, inflation adjusted, for the foreseeable future. Prices are now at the extreme upper end of this range, and a recent Yahoo Finance poll indicates that most people think oil will hit $80 before it retreats to $70. That, it seems, is reason enough to take another look.

I'll have to admit that $75 oil has not dampened demand as much as I expected. Just yesterday I made a 50 mile round trip to a historic battlefield with some friends. Despite the fact that we live relatively close to each other, we took two separate vehicles. Granted, there were 5 of us, plus two dogs, so it would have been a bit cramped in a single vehicle, but one was a large, crew cab pickup, so it would have been possible to carpool. This is the kind of conservation I would have expected to blossom with oil at $75. And, national gasoline demand trends indicate that this is typical-demand continues to trend upward at about the same rate. And, I have seen few jumps in conservation investment in other areas such as insulation and computer control.

On the supply side, things are progressing more as I would have expected. Solar energy companies are reporting a tripling of sales, and wind farm announcements and new wind energy companies are proliferating. Railroads and mineral companies are surging, based largely on demand for coal usage. Investment in heavy oil is increasing. Meanwhile, demand for drilling rigs continues to surge. Engineering studies for future nuclear plants have been initiated recently. Even OPEC recently stated that they believe oil prices in the $60-65 range are optimum for "both consumers and producers." Of course, OPEC may change their minds if demand is not dampened by current higher prices. It wasn't so long ago that they were committed to keeping prices in the $20-25 range to "avoid damage to the economies of the consuming countries." Ultimately, their motivation is to keep prices at a level that does not significantly destroy demand.

So, in a nutshell, economics seem to be working on the supply side to keep supply-demand balanced. On the demand side, at least at the consumer end of the spectrum, it would appear prices may not be high enough to damp demand. I'm no longer well enough connected in industry to see whether the same holds true there, but demand trends seem to indicate little effect of higher prices yet.

Perhaps the operative word is "yet". It takes a while for a conservation mentality that matches current prices to take effect in the general public. Many seem unaware of the conservation investment opportunities that are currently knocking. And, as I explained in a previous post, energy supply-demand is remarkably inelastic in the short term, but very elastic in the longer term due to the long time horizons typically required for energy investments.

So, is the $50-75 range still applicable? For now, I believe it is. I voted for $70 oil in the Yahoo Finance poll. Many "experts" have recently stated that $80 oil is now all but inevitable, so I'm in the minority. And, if peak oil is close at hand, and conservation does not pick up soon, I could be wrong.

The next few weeks should be very interesting.