Two predictions on crude oil prices:
1. Me, September 2007, driving car pool to school for my son--"There is no fundamental reason why crude oil prices should be above $45/barrel. It makes no sense, given production costs and the difficulties of enforcing cartel discipline. Prices will come back down, mark my words."
2. Shawn Tully, of Fortune Magazine: "Why the Boom Will Eventually Bust."
The current price of crude oil: $43.40/barrel
The current credibility of those "peak oil" morons: Zero, same as always.
2 comments:
While I agree with your analysis, I believe there is another variable that had a much larger influence on this bubble than in the past, namely sovereign wealth funds (i.e. gubmints acting as market participants). For example, whereas the US will pressure countries with oil reserves to open up their resources for development by US oil companies (being the highest bidder of course), countries such as China just go into these countries and "buy" the resources, which are then developed by state owned companies.
The result is that market forces are supplanted by gubmint actors who will pay any price to ensure the physical supply is provided to their citizens (at a subsidized price of course). Unfortunately for a commodity like oil, which cannot be easily substituted, this plays havoc with prices. Since any price will be paid for the product (financially or militarily) the markets cannot set the price accurately based on supply/demand.
Fortunately the Republicans did find a solution, suspend the federal gas tax. The result is gas under $2 (insert sarcasm here).
I think prices in the mid $30s seem exceptionally low by today's standards
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