In his 30 years studying economics first in China, then since 1989 in the United States, economist David H. Wang has seen it all. Or at least he thought he had seen it all, he said.
Oil: a $100 plunge
"Oil is just about set to total a $100 fall in less than five months, which is unbelievable. It's hard to fathom," Wang said.
But, if oil, which dropped $3.41 to $49.91 early Thursday, falls $2.64 more, it will have recorded the mind-boggling $100 plunge Wang spoke about.
Oil hit a record high of $147.27 per barrel in July on what analysts then largely argued was an inability of global oil supply to keep up with oil demand growth in Asia, stemming from surging emerging market GDP growth.
However, what we now know, with the advantage of hindsight, Wang says, is that the truly ridiculous $147 price for oil this summer was fanned primarily by a liquidity bubble - - in the form of dollars and a low-interest yen deployed to commodities by institutional investors, among other oil market players. Oil demand played a role, Wang added, "but not to the degree that excess liquidity did, chasing a high-return asset [oil]. Likewise with the weak dollar."
Further, as investors know, the global financial crisis intensified in the second half of 2008, liquidity dried-up, and so did oil's bubble.
In addition, with Europe and Japan already in recession, the U.S. economy contracting (if not officially in a recession yet), and GDP growth decelerating around the world, the key question now is whether oil demand will be sufficient to maintain an oil price at/near $50.
"We want oil's price to be low, but not too low. A low price for oil will assist both U.S. and global economic recovery by increasing disposal income and business costs in countries that use a lot of oil," Wang said. "But too large a fall in oil prices would indicate poor business demand conditions, which is something no one wants to see."
Oil Analysis: Another stat that shows how much the oil -- and economic -- landscapes have changed: regular unleaded gasoline topped $4.20 per gallon in New York earlier this year. It's now below $2.30 in New York and below $1.90 in many regions of the United States.
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Reader Comments (Page 1 of 1)
11-20-2008 @ 2:06PM
beachpaul said...
Seen it all? You haven't seen anything yet. The oil futures market should have been for the benefit of companies that were actually in the oil business, not a poker table for hedge funds. Supply and demand drove nothing. It was fraud that drove the price upward. Tell the truth! Liquidity bubble, please! Wang should become a realtor.
11-20-2008 @ 2:09PM
David R. said...
So, let me see if I understand:
When the economy was cruising along, oil reached $147 due to a speculative bubble caused by leverage, with people borrowing money to bid up oil prices.
With a downtick in the economy, oil reacts violently, shedding 66% in a short time period. Why? Demand is down a few percent, and even though oil is an inelastic good, this appears to be more than simple supply and demand.
This along with the very recent history of oil price speculation leads me to believe that the current price of oil is depressed in the same way that it was inflated earlier this year. So I don't believe Wang when he says, "But too large a fall in oil prices would indicate poor business demand conditions". There are much better business indicators out there, like unemployment and foreclosure rates. This is just people placing bets.
Enjoy betting on oil. I'm going to stay away, tyvm.