A Case for Higher Prices of Oil

Whether or not oil was fairly priced in world markets, the fact remains that it is a depletable natural resource, a real form of wealth, and therefore it has to be fairly exchanged by other forms of wealth. In this conversion process, the wealth holder has the right protect himself against constant decline in the purchasing power if paper money if it is used as the medium of exchange. During times of high inflation, paper money cannot perform fully its function as a store of value while prices of commodities have to be adjusted to hedge against the decline in the purchasing power of money.

Furthermore, higher prices of oil will serve as the most effective method of achieving conservation as the cheap and abundant oil in the past had led to wasteful use of this valuable natural resource on the one hand and had made it economically difficult to develop alternate sources of energy on the other hand. In 1950, solar energy satisfied 9.4% of total US consumption of energy while in 1970, the percentage dropped to 5.37%. In 1950, coal satisfied 35.9% of total US consumption of energy while in 1970, the percentage dropped to 18.87%. Whereas, percentage use of petroleum and natural gas of total US consumption of energy increased from 54.65% in 1950 to 75.65% in 1970.7

Higher prices of oil can serve dual purpose: reduction in wasteful use of oil and a reduction in demand for oil with the end result of spreading this valuable resource over a wider span of time necessary for mankind to develop alternate sources of energy. No matter how much new oil may be found, eventually its reserves will have to drop. As oil reserves are depleted over time, the market economy=s invisible hand will be at work. Oil becomes more valuable in economic exchange. Hence, further incentives are created to develop substitutes for energy in a smooth non-disruptive transition.

Introduction Pricing of Oil Demand and Supply

Recent Developments in Oil Pricing A Case for Higher Prices of Oil

Oil Revenues Allocation of Petrodollars Concluding Remarks/Notes