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You Think Oil's Going Down? Think Again

If you aren't counting your nickels and dimes (and $20s and $50s) at the pump just yet, or cutting back on air travel, or finding ways to cut your heating bills, you soon will be.

I was talking this week with Geoffrey Heal, a professor at the Columbia Business School, who believes that "the sky's the limit" when it comes to oil prices, and that it's possible we haven't even gotten airborne yet.

He also believes that as oil reserves grow scarcer and oil prices climb beyond the $125-a-barrel range in which they've been trading, it will increasingly create both challenges and opportunities for businesses and change the way we go about our lives.

Heal has lately been thinking a lot about Harold Hotelling, a preeminent economist and Columbia professor in the 1930s and '40s. Hotelling had a theory that once a society determines that a resource like oil is finite, its price will keep climbing higher and higher. People will gradually begin seeking an alternative before it actually runs out because it will become steadily more unaffordable.

We've reached a new inflection point with oil, Heal says, because we're using it up faster than we're finding new reserves, a situation that we didn't face even during the oil crisis in the 1970s.

Consider some statistics.

Americans now use twice as much oil as Saudi Arabia produces every day, according to the Energy Information Administration.

The 30 countries in the Organization for Economic Cooperation and Development account for two-thirds of the world's daily oil consumption -- with the US leading this elite pack by a wide margin -- but the real growth in demand is happening in the developing world. In the 1990s, oil use grew by 35% in non-OECD countries, vs. 11% in the developed world, according to the EIA.
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