The "Totally Informal Economics Roundtable" (TIER) met this week. Readers of this space know that the esteemed Roundtable achieves a quorum whenever yours truly and my three astute economist friends from graduate school convene to discuss matters economic... or to celebrate the birthday of one our school-age children.
This week's the topic was oil's remarkable 4-year run to $135 per barrel.
The TIER agreed that, yes, speculators, traders, hedge funds, and other institutional investors had driven oil to a 'bubble' price or level -- but not due to any conspiracy or coordinated effort to push prices higher.
Rather, the TIER agreed that speculators bought oil futures and other oil instruments: because a) they believe the price of oil is headed higher, and/or b) they believe they'll benefit in some way from an oil-long position.
Therefore, the TIER agreed that the excess buying itself has increased oil's price by about $30-40 per barrel. The TIER also argues there's a $15-20 geopolitical premium (Iraq War, Iran, Middle East tensions, other social unrest zones) built into oil's price.
Hence, absent the above, the price of oil under normal conditions would be about $75-85 per barrel.
Investors and readers may view $75-80 per barrel as a low price; further, the TIER did not say oil prices will return to that level in a few weeks. But the slowdown in the global economy, combined with the increased use of substitutes, along with efficiency improvements, should lead to a moderation in oil prices, once the speculative bubble has been burst. And that price moderation could occur as soon as later this year.
Moreover, for those who see a $75-80 oil price as too low, keep in mind that most oil projects are still remarkably profitable with oil at that level. And oil at $75-80 still represents an impressive gain for a commodity that traded at below twenty bucks a barrel some ten years ago.
Economics Roundtable: Oil bubble: yes; price fixing: no
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Reader Comments (Page 1 of 1)
6-02-2008 @ 7:23PM
Alouisis said...
Speculators have driven the price of oil to near double its true value. However, tyhe price will not come down. We are stuck here and the price of everything else will become inflated to narrow the affordability gap.
Wait till you see all of the new millionaires!
6-02-2008 @ 7:59PM
william lindblad said...
Depends on what and who you are referring to. Part of price is market speculation. Part of price is dollar valuation. Part of price is the oil companies. The worst of the pack are the oil execs. It is just too easy to keep a tanker anchored offshore. It is just too easy to have refinery problems. It is also very easy to be creative. Seeing is believing.
6-02-2008 @ 9:20PM
gurujr said...
TIER:
Keep living the dream. Crude oil going to $75-$80 is like waiting for Chicago Cubs' box seat tickets to be $5 again. How many people would just be happy if oil came down to $110? Face it, there are just too many premiums in oil to have it drop significantly. OPEC countries have new cities to build. Other countries have ditched the dollar but use crude oil as their means for currency. Capacity is just plain shrinking. Speculation happens but hasn't Washington's Congress exacerbated this energy mess with their lack of ANY energy policy.
Until Congress comes to an actual policy who is the next scapegoat will they find besides traders, index fund managers, and private equity. Everyone but themselves.
6-02-2008 @ 10:57PM
Jeff said...
The head of Exxon Mobil recently testified before a congressional committee that it now costs $70 per barrel to get oil out of the ground. I would argue that in itself indicates oil will never again go below $90 per barrel on the spot market, no matter what assumptions are made about market forces.
6-03-2008 @ 2:11AM
Lawrence Phoenix said...
I remember predictions of economic woe that were suppost to last decades into the future due to high oil prices in the '70's. What actually happened is consumers, Government and industry found ways to cut way back on oil in about two years and the bottom fell out of crude oil prices..if you've gone long on high oil prices this time you're headed for a haircut that may resemble a decapitation...
6-04-2008 @ 4:29AM
fred said...
very nice wishful thinking.