At a Wall Street Journal conference in California last week, billionaire Texas oilman T. Boone Pickens said: ‘If you don’t think we’ll see US$200 to US$300 oil in 10 years, you are kidding yourself. You think OPEC is a free market? We [Americans] have no control over what is going on.’ Sure, oil prices aren’t going to stay down at the US$40-50/bbl mark once the global economy gets back on track. And yes, OPEC is a pretty powerful cartel with the ability to put a squeeze on supplies (let’s leave alone the free-rider problem for now, shall we). However, this dog is unconvinced that OPEC would be able to manipulate prices up to US$200-300/bbl, and to then keep them there indefinitely. In my view, Pickens’ prediction is pretty preposterous.

If OPEC did manage to push oil prices up to US$200/bbl – and it would probably have to shoot itself in the foot by producing next to nothing to do so – and more importantly, if ‘everyone’ (consumers, ‘the market’, etc.) expected it to hold at this level indefinitely (rather than just spiking and crashing like it did in 2008) then the incentives to use substitutes would grow and grow. Just focusing on substitutes for petrol and diesel for now, all of the current alternatives for powering vehicles have ‘issues’: batteries are heavy and take ages to recharge; hydrogen as a fuel is not particularly efficient, and according to sceptics, may never be; bio-fuels are potentially the way forward but are controversial as the spike in world food prices in late 2007 and early 2008 was at least partially blamed on the use of arable land to produce them.

However, US$200/bbl would make these alternatives a heck of a lot more appealing, in spite of their respective problems. And innovators would certainly be incentivised to come up with new alternatives. After all, I’ve heard it said that necessity is the mother of invention. So, simple economics would suggest that viable alternatives to petrol and diesel would lower oil prices through increased competition. Am I being too sanguine?  Comments are always welcome.

If oil prices really did find a long-term equilibrium around the (let’s say) US$80/bbl mark, then Middle Eastern oil producers wouldn’t be able to base their economies on their oil sectors ad infinitum. They would have no choice but to diversify (sure, this is not a new or original refrain) and to produce more goods and services (in addition to oil) that people actually want. And selling real estate à la Dubai doesn’t really count as sustainable growth, as the bursting of the property bubble there shows. Thinking about it, financial services might not be a growth industry for some time either. I’d suggest that this means Middle Eastern companies are going to have to become increasingly innovative and creative, and that this requires the free flow of ideas within their societies. If the Middle East doesn’t want to be left behind by the rest of the world as oil becomes a decreasingly important component (relatively speaking) of their economies, then perhaps the only solution is greater political liberalisation and openness. The only problem is getting the leaders of these states to agree to this…