Tuesday, December 09, 2008
Cheap Oil - Forever!
Or at least for five years? Does anybody know what Paul Day was saying about the price of oil a year ago? Perhaps he wasn't among those who believed that we would never again see oil below $80-$100/bbl, but I suspect that most of the people presently projecting five years of low oil prices were then projecting indefinite high oil prices.
These low oil prices are a mixed blessing. It's nice to be able to fill up a gas tank for less than $50, and that fewer people will be fretting over whether they can afford to heat their homes this winter. But if prolonged, low gas prices will lead again to short-sighted manufacturing decisions by carmakers, and short-sighted purchases by consumers. It will make it harder to argue for, or justify the budget necessary for, preparing for the inevitable future in which energy prices again hit record levels. If low oil prices persist, they also reduce the amount of exploration for, and development of, hard-to-reach sources of oil, where the cost of production may be $70-$80/bbl.
I suspect that a big part of the drop in oil prices is less a question of world demand, and has more to do with wealthy investors and hedge funds having to sell off their oil futures to cover margin calls. We seem to be in an odd state of uncertainty, in which those large investors are afraid to buy up certain commodities in case their value continues to drop, but where that lack of investment perpetuates a cycle - the falling prices force additional sales, but again with no buyers, so prices continue to drop (or at best hold steady). That uncertainty extends into other markets where the wealthy once thought it was safe to hold their money - anybody looking to buy some contemporary art? (Maybe Hank Paulson should buy up a few billion dollars worth, to restore confidence to the markets....)