Wednesday, January 13, 2016

Going down. Price of oil, that is!

A year ago, I blogged about the collapsing oil prices, in which I quoted from a Project Syndicate op-ed:
economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20. 
Apparently we are getting closer to the $20 floor-price!
AAA and GasBuddy, two organizations that follow gasoline prices, say that gasoline prices below $2 will not be unusual in most of the United States. As oil prices fall, and refinery capacity stays strong, the price of gas could reach $1 a gallon in some areas, a level last reached in 1999. As a matter of fact, the entire states of Alabama, Arkansas, Missouri, Oklahoma and South Caroline have gas prices that average at or below $1.75.
The dollar at the pump seems overly optimistic.  But, I get the point--prices will fall some more before refineries are forced to shift to a different mixture in the spring.

Less than two dollars a gallon.  Oh my!  I wonder what all those left-environmentalists who complained that oil corporations were conspiring to keep the prices high are now talking about; damn, if only I hadn't pissed off the faculty colleagues, I could have asked them ;)

The eternal optimists at Reason are, rightfully, dancing with I-told-you-so moves:
In fact, it is very likely that the world is now experiencing the downward sloping side of latest commodity super-cycle. Generally speaking, as each succeeding super-cycle unfolds resource prices eventually reach levels even lower than the nadir of the previous cycle. In any case, depletionist innovation-deniers need to be publicly shamed.
And oil prices are dropping because?
Oil is priced in dollars, so a stronger dollar makes oil relatively more expensive for all consumers using currencies other than the dollar. Morgan Stanley says that while the oil glut is responsible for oil prices falling from triple digits down below $60 per barrel, the fall from $55 to around $35 largely comes from the strong performance of the U.S. dollar over the past year.
So, what should I tell students about the future price of oil?
Last fall, Goldman Sachs even suggested that the current oil price slump mirrors what happened when oil prices collapsed in the 1980s and remained low throughout the 1990s. In other words, humanity may enjoy low oil prices for perhaps another 15 years.

How good are those oil price predictions?  We need to keep in mind a quote that Reason offered a year ago:
When contemplating the future of oil prices, one should always keep in mind U.S. foreign service officer James Akins’ observation, “Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and the prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah.” Akins wrote that in 1973.
As Yogi Berra famously said, making predictions is difficult--especially about the future ;)

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