Supply and demand shall set ye free.

Oil price rebound
By Steve Chapman in The Washington Times

Gas prices are high because crude oil has been selling for upwards of $60 a barrel. But that price fortunately looks as transient as a summer romance.

The going rate has been pushed up in the last couple of years by rising fuel consumption. But Michael Lynch, president of Strategic Energy and Economic Research Inc., says global demand has fallen short of predictions this year. Not only that, but crude oil inventories have been expanding in the U.S., which should help push prices down.

It turns out the law of supply and demand has not been repealed: When the price of oil rises, people consume less than they would otherwise. The longer oil remains expensive, the more people will look for ways to conserve it. Already, car buyers are flocking to gas-stingy hybrids, which were once regarded as the equivalent of living in a yurt.

Mr. Lynch expects prices to drop to $40 a barrel by the end of the year, if not sooner. He's not alone: The Russian government has drafted its 2006 budget assuming that's all it will get for its oil. That would bring gas prices down in the range of $2 a gallon.

Some alarmists, known as "peak oil" theorists, predict world output will hit its absolute limit soon -- in November, to be exact -- and then begin a steady, unstoppable decline. But pessimists have always been wrong before, and I'd bet a barrel of oil they'll be wrong again.

Why? Because aside from dampening demand, high prices have served the other useful function assigned to them by economics textbooks: boosting supply. Oil producers, spurred by the lure of big profits, have been investing like mad in new sources.

"Significant new capacity will be coming onstream -- much of it launched a few years ago on price assumptions much lower than today's market prices," according to Daniel Yergin, chairman of Cambridge Energy Research Associates. A recent study by his firm says that, based on investments already made, worldwide output could rise by as much as 20 percent in the next five years. CERA thinks the peak of global production is indeed on the horizon -- but not till after 2020.