Thursday, March 26, 2009

What's "up" with oil?

As the world's economy fell apart over the past half year, the price of oil fell apart with it—at least if "falling apart" means toppling from last year's lofty level of $140 per barrel. But it has been fascinating to watch how oil has performed in a profoundly weak economy, following big reductions in world-wide demand.

Over the past few months oil has essentially been in a trading range between approximately $35 to $45. That alone is telling: It was almost the consensus opinion of energy economists not so many years ago that oil would never sustain prices in excess of $30 per barrel. Many were predicting that long term prices between $10 and $20 were more realistic. I agree that this was all very silly—even without the benefit of hindsight—but it was nevertheless the prevailing opinion.

So $35 to $45 at the depths of an extremely deep and wide recession says something very important about the price floor for oil, and once again underscores the reality of ever diminishing supply. The disciples of cheap oil—if any remain—have some explaining to do.

As if that weren't enough, oil is now breaking out on the high side, trading at around $54. The significance of that is anybody's guess. Maybe the oil markets are anticipating an economic rebound over the next year or so. Could happen. But even with optimistic expectations, $54 is an awfully high price in such a weak economy, which once again suggests that supply is suspect. God help us when demand returns.

Consumers have no doubt noticed that gasoline is tracking higher as well, although prices at the pump are still half what they were at their peak. Remember how it was with $4 gas, with big pickups and SUVs parked on every corner sporting "for sale" signs? No doubt the panic has passed, and complacency has returned. That's a very big mistake.

Copyright (C) 2009 James Michael "still glad to have my Prius" Brennan, All Rights Reserved


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