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When the Oil Boom Turns to Bust

NEW YORK ( TheStreet) -- The present recovery is fueled by, well, fuel.

Fracking has uncovered huge pools of oil in Texas, Ohio and North Dakota, creating an economic boom in those places that has trickled down to the rest of the country.

A Texan may have no more incentive than an Arab to give you a better price on his oil, but he does spread the wealth around, as I saw on a recent trip to Kingsville for my daughter's graduation.

But every oil boom carries within it the seeds of its own destruction.

I have seen this movie before.

After leaving Houston for a daily newspaper job in 1981, I returned in 1984 to see the boomtown I had known transformed into something out of the Great Depression. Billboards advertised churches, roads were empty and buildings see-through. Friends who had graduated from Rice University with high hopes a few years before were taking blue-collar jobs from which they would never recover.

What caused that bust was a precipitous fall in oil prices, begun by Fed Chairman Paul Volcker's tightening of the money supply to choke off inflation. President Reagan also had the Saudis open their oil spigot wide, causing Russian commodity prices to crash and leading to the victorious end of the Cold War.

The cause this time will be different, but the result could be the same.

Renewable energy doesn't look like much right now. It may replace just 1% of demand this year. But it's in the nature of technology that 1% quickly becomes 2%, 2% becomes 4%, and 4% becomes 8%. Even if you think solar and wind energy are government-created frauds -- and financiers no longer think that, as Gigaom's Katie Fehrenbacher notes -- efficiency isn't. Getting more work from less fuel, over time, means less demand.

So what happens then? The high-cost streams are priced out of the market first. Canada's "oil sands" (formerly the Alberta tar sands), deep fracking and deepwater drilling cost more than re-tapping fields in Arabia and Iraq, or fracking for gas closer to markets in Europe and China.
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