Thursday, October 16, 2008
Oil runs down hill
Oil is at $72 the barrel this morning, down from $147 in July. In other words, it has fallen by more than 50% in three months. The cause of this decline in price is not good -- global demand is collapsing because the global economy is slowing down in a hurry. The result of cheaper oil, though, has obvious advantages.
Gasoline prices have fallen and will continue to fall, which will be blessed relief for stretched American families. If they stick to the hard-won habits of conservation learned in the first half of the year they will spend a lot less money on gasoline than they did when oil was last at $72. To most people, that is just like a tax cut.
Lower oil prices will roll through the economy, lowering the burden of a key input. Producer prices will fall in a few months, and that will reduce the rate of "core" inflation (which excludes food and energy, both of which are so volatile that they obscure what is really going on with the price level).
Horrible people all over the world will get less money. This is half as much money for Mahmoud Ahmadinejad, Hugo Chavez, and the brawlers in the Kremlin. "Our friends the Saudis" will have to tighten their sashes just a bit.
Finally, it is good news for the dollar. There is a lot to Barack Obama's complaint that we "borrow from China to buy oil from the Saudis." It is a little silly, since we also borrow from the Saudis to buy, well, stuff from the Chinese, French, and Japanese, but we get his point. To the extent it is economically sensible to do so, substituting efficiency, conservation, and new sources of energy for foreign oil is a good idea.
9 Comments:
By 
Charlottesvillain, at
Thu Oct 16, 08:53:00 AM:
Even so, I expect you to settle our wager at Thanksgiving.
By TigerHawk, at
Thu Oct 16, 09:02:00 AM:
By 
, at
Thu Oct 16, 09:40:00 AM:
Didn't TH have a post about last Feb predicting oil would hit $60 before it hit $150? If so, it is getting awfully close to coming true.
By Escort81, at
Thu Oct 16, 11:47:00 AM:
I am not by any means saying the market for oil has been rigged, but the demand elasticity of spot oil (that is, the amount by which the price changes for each unit change in perceived current and/or future demand) over the last five years is hard to fathom. I don't think that oil supply has changed meaningfully over that period, so it is proper to focus on the demand side. I realize we have seen oil cut in half previously (in the 1980s, when Reagan persuaded the Saudis to turn the spigots wide open, and again in the aftermath of Gulf War I in the 1990s), but this seems different, if only because the sustained high prices were so remarkable. But we are looking at a pretty steep demand curve, if, say, a 10% drop in perceived future demand (which is a big number, and probably overstates reality) leads to a 50% drop in commodity price.
If oil is down to $50/bbl by Thanksgiving, I think TH should be exempted out of paying off the bet. I also think that would be a good time for W to "take care of all family business" (as Michael Corleone would say) and see about Iran -- who cares if prices double to $100/bbl -- so that President Obama has that off his plate in Jan.
By clint, at
Thu Oct 16, 11:51:00 AM:
Don't worry. Whoever wins in November, by the end of January, oil will be back up to $100.
It's going to be a really, really cold winter, and demand for heating oil is far less elastic than demand for gasoline.
By TigerHawk, at
Thu Oct 16, 12:37:00 PM:
Sadly, feeblemind, I bet my brother that oil would his $60 before it hits $140. I lost the bet in July for a couple of days. That said, in losing the bet I nevertheless won my real point, which is that oil would once again be relatively cheap.
By Charlottesvillain, at
Thu Oct 16, 01:06:00 PM:
Escort,
It was a good faith bet and I took the improbable end. Damn right I'm collecting.
Regarding the price run up and collapse, there are a lot of interesting theories about this. You are correct that this is not a supply side move. Some have speculated part of the run up was caused by Chinese stockpiling in advance of the Olympics, and the fall attributuable to their subsequent running off the inventory and not buying as much in the market.
Others speculate that the collapse in oil prices is indicative of much worse than reported economic fundamentals, including a collapse in shipping, as further evidenced by the spectacular decline in the Baltic Dry Shipping Index.
On CNBC, they continue to blame "speculators" for the run up. I'm not sure speculators get credit for the fall, however.
The other point is that oil trades in dollars, and the strong run up in oil prices coincided with a historic fall in the dollar. Much of the price decline in oil is attributable to the dollar's recent recovery.
One thing is for sure, aggregate oil output has barely budged in three years, which is worriesome, regardless of prices today. If I were a betting man (and I guess there is evidence that I am) I would predict a strong secular move up once more, either due to supply constraints, a deteriorating dollar, or a combination of both. Really, its in all our interests if oil stays relatively high (over $100) long enough to stimulate investment in alternatives. This volatility makes it very difficult to fund essential new projects.
By Mrs. Davis, at
Thu Oct 16, 01:28:00 PM:
its in all our interests if oil stays relatively high (over $100) long enough to stimulate investment in alternatives.
Which is why, if either candidate had a brain, someone should have been pushing for an import duty that would set a floor price of $100 on oil imports when the price was $140. Now they could be saying I told you so.
By Dawnfire82, at
Thu Oct 16, 02:15:00 PM:
So... artificially inflating the cost of a commodity necessary for most people to, you know, live, is cool because it will 'stimulate investments in alternatives,' no matter the costs to the peons.
If I were a businessman, and I knew that oil would never fall $100 per barrel, I'd invest in getting as much of it as possible for as cheaply as possible, and import it. Then I'd host a party and call Ahmedenijad, Chavez, Abd Allah, and Putin to attend so we can laugh and light cigars with our new $100 bills.
It's not like investing in alternatives has suddenly become a dumb idea. The technology will improve and become competitive. Oil prices will rise again one day.
Hasn't the last month taught anyone that dicking with the markets to achieve outside political aims is a bad idea?
