$500 oil?

An interesting blog post from Willem Buiter of the LSE at the Financial Times web page.

So how high are oil prices likely to go once we get through the cyclical global slowdown that is now under way. Arjun N Murti, a Goldman Sachs expert believes we will soon hit $200 a barrel (up from the current $146 level). The CEO of Gazprom has predicted a $250 barrel of oil before long. Dr. Robert Hirsch, a Senior Energy Advisor at MISI and a consultant in energy, technology, and managemen, says that oil will peak at $500 within the next 3 to 5 years. While your guess is as good as mine (likely better), none of these figures seem outlandish.

Fundamentally, this means that the most effective energy policy (including the most effective energy security policy) is conservation. The only way to encourage conservation is higher prices for the user, that is prices that fully reflect the long-run social marginal cost of energy. We are just beginning to see more realistic prices for energy, even in parts of the world where low-cost energy is seen as a social entitlement.