Paul Krugman has a good piece today on the recent behavior of oil markets, and the evidence that the run-up in prices reflects durable trends in oil demand and supply rather than some short-lived commodity bubble. Basically, what we're seeing with $100 a barrel oil is that it's still being used, and in much the same quantities, and the demand curve still looks to be sloping upwards. Turns out oil use isn't terribly elastic, at least not in the short-term. Given all that, it's not very likely that oil will tumble back down to $40 a barrel any time soon. The more remarkable lesson, however, is just how much cheaper oil has been than every other potential energy source, because even now, at quadruple the price was saw less than a decade ago, it's still cheaper than the current alternatives! In the short-term, conservation, rather than substitution, is really going to be the only viable method for dealing with energy costs. And hey look, there's some happening now...
