The Ship Turns

By INVESTOR'S BUSINESS DAILY
Friday, May 02, 2008 4:20 PM PT

Call it the paranoid theory of petroleum. Somehow, dark
forces behind the scenes keep us from doing anything
about soaring oil prices. In fact, something is being done to
bring down oil prices. And you're doing it.

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For some, rising oil prices prove that oil companies and
petrotyrants around the world must be in cahoots to create
energy shortages. By that theory, we can do nothing about it.
Eventually, government will have to step in.

But in fact, even as our own dithering Congress refuses to
help ease the energy crunch, things are already changing —
thanks to you, the consumer, and you, the producer.

That's right: It's the private sector that's doing it.

One of the glories of a capitalist system is that price signals
are allowed to work. When the price for a good rises, that
means it's in scarce supply. When the price falls, it's relatively
abundant. This signals to users and producers they must
change their behavior.

For users, higher prices mean finding ways to do with less.
For producers, they mean finding ways to produce more. The
confluence of these two forces usually results in lower prices.
This is what's happening now with oil.

It's true that the booming economies of China and India are
sucking up ever more energy. But guess what? As the price of
crude has soared from $30 a barrel to $50, then to $70 and
past $100, we've all changed our behavior.

For oil companies, it has meant drilling for more oil. According to
data from a variety of sources, world oil output has jumped by
11%, or 8.5 million barrels a day, since 2002, to 83 million
barrels a day.

Contrary to the predictions of petro-paranoids, private oil
companies are producing flat out — even though government
entities such as the Organization of Petroleum Exporting
Countries and the U.S. Congress work to keep prices high.

Fueled by the high prices, new sources of oil are being
discovered. They include the 33-billion-barrel bonanza recently
found off Brazil's coast and other huge finds in the Caribbean
and Asia.

The U.S. itself has 656 trillion cubic feet of natural gas and
112 billion barrels of oil on federal lands alone — there for the
taking if only Congress would allow it.

But even without it, we're going gangbusters. As the American
Petroleum Institute recently noted, "an estimated 4,577 (U.S.)
oil wells were completed in the first quarter of 2008, up 12%"
from last year and the highest rate since 1986. U.S. oil
companies are going back to tapped-out wells and pumping oil
that wasn't economically recoverable at $25 a barrel but is at
$100.

That's the supply side. What about demand? U.S. fuel demand
in the first three months of 2008 was down 1.4% from a year
earlier — the third straight quarterly year-over-year decline in
a row.

Gasoline consumption has risen about 1.5% a year since 2000.
But Energy Department data showed demand in the first
quarter edging down for the first time in more than two
decades.

In short, the tide has turned.

The New York Times notes that U.S. car buyers have
suddenly gone ga-ga over small cars. One in five purchases
is now a compact or subcompact, while SUV sales are off
28%. "It's easily the most dramatic segment shift I have
witnessed in the market in my 31 years here," said George
Pipas, Ford Motor's chief sales analyst.

So, even as Congress twiddles its thumbs, the private sector
is doing its thing — adjusting to the market to make things
better. The bad news is, there's no guarantee that oil prices
won't go up more. The good news, as recent trends show, is
that it won't last.