Monday, November 26, 2007

$1?0 per barrel oil?

A few years ago some analysts started suggesting that oil could reach $100/barrel. That prediction was greeted with a lot of pushback on Wall Street. Whether the pushback reflected objective analysis or wishful thinking is an interesting question. Some thought it was just hyperbole, others such as Morgan Stanley argued that fundamentals would cause prices to come back down. Their actual prediction was that "oil prices are likely to collapse". Which just leads to the conclusion that not all prognostications are created equal. But even if the best guess was that $100 would not happen, just given general trends in recent years, why was it so far from being conceivable.

Weekly analysis of the nation's oil markets is put out the Department of Energy. I really think the author(s?) of this should get some award. Nowhere else in the vast labyrinth of federal government statistics will you find anyone who has a sense of humor, except here. The archive of their weekly commentary is online here. That old commentary is worth a read if you are interested in gas prices. A couple weeks ago they explained oil prices all in terms of the college football Bowl Championship Series (BCS).... and it was just a few months ago in July that they asked "Will Crude Oil Prices Reach $80"? On Friday oil hit $99.16 per barrel.

But humor can't make the price go lower. The current version of their This Week in Petroleum points out that it takes "3 to 6 weeks for price changes in the crude oil market to completely filter through to prices at the retail pump". The last few weeks have seen some of the bigger increases in crude oil prices. Sooo...

So maybe I should have put the question mark in the first digit of the title. No way you say, oil prices can't double... it's just not possible. Well, when you consider that between November of 1998 and last week oil prices hav increase from $10.86 to $99+, a 900+% increase... what's a marginal 100% thrown in there? I didn't say next week.

a Pittsburgh angle: for some useful crowdsourcing before the term was even invented see:


Anonymous Anonymous said...

One thing I haven't seen a good explanation of is what effect, if any, the devaluation of the dollar has had to do with the price increase. It is important to know the why's of the price increase, and I'd be much more comfortable if I knew that prices have jumped due to a low dollar or inflation versus hitting peak oil production or something along those lines.

Tuesday, November 27, 2007 3:17:00 PM  
Blogger C. Briem said...

I think the answer to that is all tied up in what we call 'purchasing power parity' and what happens to non-dollar denominated demand when the dollar devalues. but the dollar has not devalued that much compared to the price of oil, it can only be a part of the story.. in the big picture, only a small bit.

Wednesday, November 28, 2007 4:42:00 PM  
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