Oil prices recently breached the $100 mark for the first time. The other day, I heard theories suggesting that oil prices might make it up to $200 a barrel. I suppose forecasters like round numbers! I don't expect oil prices to reach those lofty levels any time soon. In fact, I think they might drop off somewhat. We're not going to run out of energy because we lack resources. These predictions of $200 oil are based on the idea of "peak oil". This idea of peak oil is the exact reason why I'm betting against high oil prices.

Peak oil rests on the notion of depleting a known stock of oil. It's logical to assume that as supply declines and demand rises that the price of oil will also rise. However the supply of oil will also rise as its real price rises too. New oil fields are constantly being discovered, most recently off the coast of Brazil. Oil exploration companies are hard at work looking for new sources. Supply won't stay fixed as the peak oil idea requires! And neither will demand. As oil prices rise, demand for oil will go down, and people will turn to alternative sources for energy.

If oil prices do reach $200 in the near future, it won't be doomsday, for there are multiple sources of energy. In real terms, $200 oil is a high enough price that businessmen will be working very hard to bring more oil into the market and to bring into the market other sources of energy. Of course, this all depends on how well the free markets in energy operate. However, as the price of oil rises, so does the incentive to develop other sources of energy to compete with oil. They will also look for ways to more cheaply extract the oil. Economics will also demand that "energy-efficiency" be engrained into the culture. Everything from light-bulbs to building design will be altered to be more energy efficient. Much of this is already going on, some of it is partially mandated by government, most of it is not.

Demand from countries like China and India have shifted oil prices upwards in recent years, above median highs. Historically though new supplies have come to market and offset the rising demands of industrializing countries. The same thing will happen now, and that means that prices will likely stabilize and decline in the long term. There are bigger concerns than peak oil or prices in my view, like the effects of burning those fossil fuels into our atmosphere.