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CNN Money’s Editor at Large Shawn Tully tells us Why the oil boom will eventually bust.

An excerpt:

If you stick to basic economics, it’s clear that the only question is when – not if – prices will succumb…

Almost exactly the same thing happened in the housing market. Both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.

So when the economy roared back in 2002 and 2003, builders couldn’t turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.

Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what’s driving down prices today.

The story is much the same with oil, with a twist. A big swath of the market isn’t really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption – and driving up prices even more.

But sooner or later the world won’t keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.

If nothing else, Tully’s article is a breath of fresh air for anyone who has been following the gloom-and-doom that is our mounting oil crisis. 

But could it be true?  I’m no expert, but it seems to me there is at least one major difference between the housing bubble and the oil “bubble”: There is a very finite, very limited supply of oil.  The housing bubble was driven up by frantic buyers, yes– but there was never any danger of running out of houses. 

According to Tully, it’s not that we’re running out of oil, it’s that the supply is bottlenecked.  In other words, the oil is there, but the production process is inefficient.  If this is true, Tully is correct– and once the production process becomes more efficient, prices should stabilize. 

However, if we really are nearing the end of our oil supply, prices will continue to climb until it’s gone.  Hopefully by that time we’ve got an alternate source of energy– or we’ll all be riding bikes.

Thoughts?

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