This is the Cato Daily Podcast for Monday, June 23rd, 2008. I'm Caleb Brown.

With gas prices at almost historic highs, what can bring them back down to earth.

Cato Institute Senior Fellow Alan Reynolds says with or without a recession in the works,

we should all be preparing for a large oil price drop.

We need X million barrels of oil per day to keep everything running smoothly.

The global economy, new demand from India and China and that demand is not going

anywhere and we're only pulling X minus 50. demand is higher oil prices. The word need is always relative to price. We want a lot of

things but we don't need them and marginal uses of oil become less and less attractive when the price goes sky high.

And people say, well, yes, U.S. demand for oil is off 1% or so. It's lower than it was in 2004. But you know, what

about China? China's just gonna need this oil. They need it to find fuel

generators, not so much cars.

Only about 7% of oil demand in China, so far as cars.

It's industrial fuel.

Now the trouble is the things they're making out of oil, plastic products for example, are made from petroleum,

petrochemicals. They're cheap and the product can't bring an infinitely high price so the cost of production goes up and if you lose money you stop

doing it even in China.

And then there's the transportation costs.

A lot of the goods they're transporting in China is pretty far away

from us and from some of their other markets. So the transportation costs each you alive on an inexpensive product.

So even China, I mean we're not talking but China has to go

in the tank. China just has to cut back a lot. We do have industrial production

falling year over year in a whole slew of countries including Singapore

...