I recently read an essay in Foreign Affairs magazine by Edward L. Morse, a very respected specialist on oil and energy markets. His well-researched and logical thesis is that the price of oil may stay low for the medium term, especially if the government makes some smart decisions in the near future.

What’s behind his contention? Several factors, foremost that the head of OPEC, Saudi Arabia, has an interest in a stable market, both as a U.S. ally and for its own economic benefit. During the oil price spikes of the last few years, the Saudis hadn’t finished building and bringing online a ‘reserve capacity’ to handle major increases in demand and/or shortfalls elsewhere (caused by hurricanes, terrorist disruptions, etc).

But now Saudi Arabia has the capacity to produce 12.5 million barrels per day—compared to only 9.5 in 2002. This gives it even more influence in OPEC, and with the G-20 (the group representing the world’s leading economies). These savvy Arabians know that not only does cheap oil drive global growth, but that it deters investment in alternative energy—which just doesn’t make short-term economic sense when oil is under $80 per barrel. It’s not like OPEC would like the U.S. to make good on the president’s pledge of energy independence, after all.

Morse considers many other factors as well, like advances in drilling techniques that have opened up whole new oil fields to development, both on- and offshore. And that in 2000, there were only about two dozen drilling vessels in the world—in three years, there will be near 150 plying the oceans for black gold.

Another major factor is that the world’s increase in demand for oil year-on-year is unlikely to ever hit the heady peaks of 2002-08; instead, it will return to the kind of numbers (1.0-1.3%) its averaged out at for the past decades. Combined with the new capacity in place, this should serve to keep the price of oil—hence gasoline and diesel at the pump—down.

So should we all rush out and buy Hemi-powered muscle cars and huge SUVs? Probably not. Concerns over global warming and ‘energy independence’ have motivated the Obama administration to pass the most forceful increases in automobile fuel economy standards in decades. This will force manufacturers to build more and more frugal cars, trucks, and SUVs. This shift in development and marketing dollars is monstrously large; it would be disastrous for the government to not make sure people actually buy these vehicles through incentives like higher taxes on gasoline (and possibly diesel), once the economy recovers. Otherwise, people will bypass the shiny new, super-efficient Chevys and Chryslers sitting on dealer lots in favor of Tahoes and Rams, which wont do much for the bottom lines of these government-owned companies.

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