D.C. Energy Talk Is Mostly Hot Air

I'm here to pop that bubble, and I don't mean the energy bubble. I haven't seen one of those yet. When demand for a commodity rises steadily along with the price while the supply remains the same year after year, that's not a bubble — that's a market signal. And when many of the suppliers of that same scarce commodity sell for 10 times earnings, that's got to be the cheapest bubble in history.

A reader recently questioned my forecasting credentials after I admitted to owning just one car for an entire nuclear family. We've since acquired a second set of wheels, attached to a tiny used hybrid. I believe I'm now fully qualified to advise against holding one's breath for the gas-tax holiday, the windfall profit tax or the long threatened downfall of Exxon Mobil (XOM). Though it beats hyperventilating at the pump.

The energy spike isn't like the dot-com bubble; it's not going to dissipate in a couple of years, leaving nothing but ruined portfolios in its wake. Energy is among the world's most widely traded resources and demand for it is rising mostly in faraway places where the retail price of fuel is fixed. That means energy prices and demand interact with considerable lags. And the effect of the recent price increases has been countered by rapid income growth in the developing world. Those upwardly mobile consumers aren't getting back on the bus.

Recent academic work that's looked at the historical relationship between income and car ownership around the world shows that China, India and some of the other most crowded countries in the developing world are just now entering the $3,000-to-$10,000 annual income range, a sweet spot in which car ownership tends to increase twice as fast as income. China's fleet is expected to grow at an annual growth rate of 11% to 390 million vehicles by 2030, from just 20 million six years ago. India's is forecast to increase at 8% annually over the same span.

Not coincidentally, Indian refineries are processing 9% more crude than they did a year ago, while China's consumption is expected to rise more than 5%, for a cumulative increase of 19% in three years. Meanwhile, the developed world will use less crude in 2008 than in 2005. The marginal energy consumer is not the soccer mom who's about to ditch the minivan for a compact. It's Asian factories that are among the world's least energy-efficient and a burgeoning middle class in South Asia, Latin America and the Middle East, all places where incomes are still keeping up with the rising cost of living.

They're already paying almost $6 per gallon in India, where rationed cooking fuels are cheap but gasoline is heavily taxed by the states. And since that retail price is fixed, consumers haven't been squeezed like they've been in the U.S. Europeans have cut back only slightly on gas that goes for more than $8 a gallon. In contrast, Saudi Arabia is bribing its underemployed young men with $1.25-a-gallon, or less than it costs to get the crude out of the ground. Other Mideast producers also offer lavish subsidies, fueling domestic demand and cutting the available exports accordingly.