Dr. Herbert London, president of the Hudson Institute, submitted this post as a guest blogger for The Hill.

As oil approaches $100 a barrel some pundits contend the price could reach $200 a barrel and could undermine western economies, involving an historic transfer of capital to oil producing nations. While this could happen, I remain unconvinced, maintaining several logical expectations:

1.      An oil price that accelerates the production of synfuel alternatives is not in the best interest of OPEC nations.  Saudi economists understand why production increased in the 1970’s when President Carter introduced his synfuels plan.

2.      While demand has been increasing, particularly from China and India, known reserves have also been increasing in East Africa, Proudhoe Bay, and the South Pacific.  Of course, crude oil is meaningless without refineries. For the first time in decades the U.S. is intent on doing something about refinery capacity.

3.      The public is increasingly aware of the fact that oil revenues translate into terrorist activity, a condition that explains why Americans are eager to see a largely homegrown fossil fuel industry such as ethanol.

We buy oil from sheiks who fuel terrorism and then we have to employ tax generated funds to fight the terrorists.  The average person realizes there is something wrong with this picture.

4.      Steps are being taken to transfer combustion technology reliant on gasoline to hybrid and electric cars.

5.      The use of sovereign Arab capital to buy western companies, and financial institutions is engendering widespread uneasiness and dissatisfaction with Middle East oil.

6.      There isn’t a presidential candidate in either major party who doesn’t discuss “energy independence.�  Of course, it would be far more accurate to say “less of a reliance on Middle East oil,� but that’s not quite as sexy.

7.      It is often overlooked that Canada has the world’s largest oil reserves, more than Saudi Arabia.  However, much of it is in the form of tar sands, difficult and expensive to extract.  However, at $100 a barrel, this fossil fuel is starting to look economic.

One of these conditions alone might not be sufficient to change the oil pricing structure. In the aggregate, however, a scenario has emerged in which high oil prices are probably not sustainable.

While $100 a barrel for oil seems like an overwhelming obstacle for business development and economic growth, it is not here for the long term.  Markets adapt to price escalation.  The oil market is in the Spring of this adjustment, but, I’m convinced, it will flower.  When it does, I’d like to be among the first to say “goodbye OPEC.�  It was a cartel that lost its way and won’t be remembered for anything except the manipulation of the market—and making sheiks more wealthy than logic would suggest they had any right to be.

This entry was posted on Tuesday, February 26th, 2008 at 4:47 pm and is filed under Politics, Economy/Budget .