Are we prepared for rising oil prices?

On February 2, T. Boone Pickens made the following prediction:

“We got a break here, a little bit of a breather (with current oil prices), but within 60 days we’ll be back up to $60 oil and by end of the year we’ll be on our way … at $75.”  Full article.

This prediction seems to presume either a declining supply, an increasing demand or both for oil in the very near future.  Just six months ago the fear (and focus of much of the political speak during the election campaigns) was that we had too much demand for the supply that could be produced causing prices to soar.  This sparked the debate about alternative sources of energy to decrease our dependence on foreign oil, and the complaints that the U.S. oil producers were making too much money in the process of trying to keep up with this demand. 

A factor that plays into Pickens’ scenario is the rig count in the U.S.  For several months, due to a decreasing demand and the resulting drop in oil prices, we have seen an increase in the number of rigs taken out of service because it is now economically unfeasible to produce the reserves.  OPEC is also reducing production in an attempt to moderate global oil prices. 

Eventually, this reduced supply will drop below the level necessary to sustain the market’s demand.  This could be amplified if demand for oil also begins to increase.  Once prices begin to rise, it may be too late for U.S. producers to react quickly since bringing rigs back online will be expensive and time consuming.  As a result, prices will rise quickly at a time when the economy may still be struggling.  If OPEC can ramp up production faster that our U.S. producers, we may end up purchasing even more foreign oil to relieve the burden of rising prices on the U.S. consumer.

Instead of trying to find ways to penalize our domestic oil producers, it might be wise to begin removing barriers to their ability to produce enough oil domestically so we can keep more of these dollars invested in our own economy.