Tuesday, November 28, 2006

Sixty-One Dollar Oil

I was asked over the Thanksgiving holiday why I've lately been silent on the price of oil. My last comment on the subject was April 22 when the price topped $75. It has been even higher since then.

The flippant answer is that I've not commented on anything recently. (Some catching up is definitely in order.) But the implication in the question, of course, was now that oil prices have retreated, I'm not so smug about proclaiming the new era of expensive energy.

So okay. Oil closed at $60.99 today. Less than two weeks ago it was below $56. Gasoline prices have steadily declined as well.

What's going on? Nothing that would make me question the essential trend I've been describing over the past couple of years. About a year ago oil dropped to similar lows after a record setting summer. In short order it headed back up to even greater highs. As I said in January, markets don't go anywhere in a straight line. Although it can give cover to skeptics, a short term perspective misses the forest for the trees.

There's no doubt that supplies have not been nearly so tight recently as they were earlier in the year. Any slack in the market provides room for prices to weaken. And it's likely that the influence of commodities speculators causes the highs to be higher and the lows to be lower.

Although I'm convinced about the fundamentals underlying the oil market, that doesn't mean that I or anybody else can predict specific prices in specific timeframes. As legendary economist John Maynard Keynes famously said, "markets can remain irrational longer than you can remain solvent."

Just because the price of oil will likely bounce around in the coming years doesn't change the fact that the inevitable direction is up. Even developments like the big new discovery in the Gulf of Mexico won't change that. There is just too much growth in demand, and too little ability to increase supply.

November 29 update - Oil closed at $62.46 today, up $1.47.

November 30 update - Oil closed at $63.13, up $0.67. Already we're more than $7 above the recent low. And so it goes.

December 1 update - Oil closed at $63.43, up $0.30.

Copyright (C) 2006 James Michael Brennan, All Rights Reserved