Here on The Futurist, we have a long tradition of seeking permanent independence from oil-drunk dictatorships and theocracies, with the pursuit of long-term gains taking precendence over the avoidance of short-term pain. I refer you to :
Why $70/barrel Oil is Good for America (February 1, 2006).
$70+/Barrel Oil, the Non-Crisis (April 25, 2006).
Terrorism, Oil, Globalization, and the Impact of Computing (August 22, 2006).
When oil first hit $70/barrel nearly two years ago, there were widespread fears of the US economy tipping into recession. I pointed out that a much smaller piece of the US economy has exposure to oil than was the case in 1974 or 1981, which were the last times such high prices were seen (in inflation-adjusted terms). Google, Oracle, and VMWare are far less vulnerable to oil prices than General Motors and Federal Express. Sure enough, after 2 years of oil prices hovering around $70, the US economy has successfully adapted to it. The specter of the $70 barrier is behind us, permanently. This chart from the Bureau of Labor Statistics shows the annualized rate of oil price inflation over the last few years.
Notice how the rise from $20 to $80 led to import price inflation (the blue line) touching 10% for three years. However, that rise is now behind us, with the settled price of $70/barrel or more no longer causing further inflation in the price of imported products. 
Even more striking is the shrinkage in the US trade deficit. Despite oil imports being as much as one third of the US trade deficit of about $60 Billion/month, the trade deficit has actually shrunk since the peak of 2006, contributing positively to GDP growth for the first time in over a decade (chart from BusinessWeek). That the US economy can now take $70 and even $80 oil in stride is the biggest story that no one has noticed yet.
However, $70 oil also fattens the coffers of the world's notorious 'Petrotyrants'. From Iran to Venezuela to Saudi Arabia to Russia, one can note that there is a rather close corelation between an economy being heavily dependent on oil exports and the leaders of that country resisting or even rescinding democracy.
Thomas Friedman has many interesting articles on the subject, such as his 'Fill 'Er Up With Dictators' :
But as oil has moved to $60 to $70 a barrel, it has fostered a counterwave — a wave of authoritarian leaders who are not only able to ensconce themselves in power because of huge oil profits but also to use their oil wealth to poison the global system — to get it to look the other way at genocide, or ignore an Iranian leader who says from one side of his mouth that the Holocaust is a myth and from the other that Iran would never dream of developing nuclear weapons, or to indulge a buffoon like Chávez, who uses Venezuela’s oil riches to try to sway democratic elections in Latin America and promote an economic populism that will eventually lead his country into a ditch.
But Mr. Friedman is a bit self-contradictory on which outcome he wants, as evidenced across his New York Times columns.
Over here, he says :
In short, the best tool we have for curbing Iran’s influence is not containment or engagement, but getting the price of oil down
And here, he says :
So here’s my prediction: You tell me the price of oil, and I’ll tell you what kind of Russia you’ll have. If the price stays at $60 a barrel, it’s going to be more like Venezuela, because its leaders will have plenty of money to indulge their worst instincts, with too few checks and balances. If the price falls to $30, it will be more like Norway. If the price falls to $15 a barrel, it could become more like America
Yet over here he says :
Either tax gasoline by another 50 cents to $1 a gallon at the pump, or set a $50 floor price per barrel of oil sold in America. Once energy entrepreneurs know they will never again be undercut by cheap oil, you’ll see an explosion of innovation in alternatives.
As well as over here :
And by not setting a hard floor price for oil to promote alternative energy, we are only helping to subsidize bad governance by Arab leaders toward their people and bad behavior by Americans toward the climate.
All of these articles were written within a 4-month period in early 2007. Both philosophies are true by themselves, but they are mutually exclusive. Mr. Friedman, what do you want? Higher oil prices or lower oil prices?
But forget about Mr. Friedman wanting it both ways. Instead, I am going to go with the second choice, that of higher oil prices. I see this as a golden opportunity for permanent, far-reaching, multifaceted geopolitical change. The US economy has successfully adapted to a permanent $70/barrel oil price with almost no real pain, and thus it is the time to take the bull by the horns, and lure the Petrotyrants into the ultimate irreversible trap.
It is time to hope that the price of oil rises to $120/barrel by 2010, and stays above that level permanently.
Why, you may ask? Won't such a high price make Iran, Venezuela, Saudi Arabia, Russia, Nigeria, Sudan, Kazakhstan, and others even wealthier, without them having done anything to earn it? Won't it make Sudan more genocidal, and Iran more able to equip terrorists? Won't Saudi Arabia be able to fund even more Madrasas across the world?
Sure it will, for a time. But consider the perils of burning the candle at both ends.
But won't this also cause economic suffering in the US? For a time, yes. Gasoline will be at $5/gallon, and the trade deficit will temporarily widen. I claim the possible recession will be brief, if there even is one at all, as the run-up from the present price of $80/barrel up to $120/barrel is already less of a shock than the jump from $20 to $80 that we already have successfully sustained. I say all of this is worthwhile short-term pain, for when the quietly toiling engine of technological innovation emerges from its chrysalis, it will be gigantic.
The technological climate of 2007 is very different from that of 1974 or 1981. There is so much breadth and depth in energy innovation right now, even at the present $70-$80/barrel, that $120/barrel will move the technology and economics of alternative energy into fast-forward. Currently, the petroleum market is shielded from exposure to both the electricity market and the agricultural market. However, upcoming electric and plug-in hybrid automobile technologies consume electricity at an equivalent cost of just $1/gallon. Furthermore, electricity can be generated from multiple sources that exist in almost every country, eliminating the weak position that oil importers are in relative to oil exporting nations. With gasoline at $5/gallon, consumers will migrate towards hybrids, plug-in hybrids, and electric vehicles so rapidly that the auto manufacturers will start engaging in aggressive competition to lower prices and accelerate innovation. This will greatly widen the fronts at which the oil market is exposed to the far cheaper and decentralized electricity market. This spells trouble for oil producers who have to compete with electricity that is 3-5X cheaper in providing the same transportation.
Simultaneously, cellulostic and algae-derived ethanol research efforts will get supercharged, greatly increasing the probability of a breakthrough that enables the attractive math of cellulose or algae to replace the unimpressive economics of corn ethanol. If ethanol from switchgrass or algae is more compelling than oil at $120/barrel, oil has yet another enemy in addition to electricity. The combination of electric vehicle and cellulose/algae ethanol technologies will act as a 1-2 punch to slash the consumption of oil across both the US and China permanently within just a few short years.
Then, the fun begins. The terrorists and despots who got lured into profligate spending under $120 oil will eventually find that the demand for their exports is plummeting. Furthermore, the thing about subsidies such as those that Iran doles out is that they are self-propagating. Note that in 2005, Iran exported $44 billion in oil, but spent $25 billion in subsidies, meaning that if oil fell to $30/barrel, Iran's export revenue would effectively become zero if the same level of subsidies are maintained. 34 cent/gallon gasoline leads to more car purchases and hence more demand for gasoline, increasing the cost of maintaining the subsidies, and hence the oil price floor at which Iran's export revenues would shrink to zero. At $120/barrel, the subsidy obligation will be so burdensome that even a drop back down to $70/barrel would lead to a revenue falling behind expenses. At the same time, China will have no choice but to aid in the hastening of these technological advances, as they will have to shift their priorities from locking up oil contracts to reducing the crushing cost of oil imports at $120/barrel.
On the other hand, if oil stays at or below $70/barrel for the long term, Petrotyrants will survive to continue their nefarious activities for at least another 20 years to come. China, too, will continue their current stance of propping up Petrotyrants.
Thus, I say bring $120 on. We outspent the Soviet Union on defense, and we can outspend the Petrotyrants while setting them up for an inevitable cornering and collapse. Give me $120/barrel oil by 2010, and I will give you the demise of Petrotyranny in Russia, Iran, and Venezuela by 2015. Count on it.
Update (10/19/07) : We're up to $90/barrel already! While there will be ups and downs in the traded daily price, and the gloomy media coverage might appear frightening, be patient and disciplined. The short-term pain will lead to permanent long-term gain.
Update (5/22/08) : Oil has crossed $120/barrel, and is currently as high as $133. Such a rapid rise usually is followed by a precipitous drop, and we need the price to stay above $120 for an extended period to realize the benefits described in the article. I might do a v 2.0 in 2008 itself if the price stays high.
Related :
A Future Timeline for Automobiles
A Future Timeline for Energy
Terrorism, Oil, Globalization, and the Impact of Computing
