Oil at 57

such volatility in such an important commodity is astounding. How can the planet "plan" with such price variations. From 140 to 57 in 3 months? How can this be the result of offer and demand.

Comments

Juha Lindfors said…
Funny I was thinking the same thing some time ago, maybe around $80 mark about all the talk how the $150 price was result of demand, peak oil and all those theories.

No speculation involved, right?

Other great financial non-sense theories: decoupling. How's that working out now?
November 13, 2008 at 1:27:00 PM PST
Roy Russo said…
I don't recall anyone credible pointing to the price spike being a supply/demand cause. Everyone kept pointing to speculators. Housing bubble, meet oil bubble.
November 14, 2008 at 7:23:00 AM PST
Anonymous said…
It was a bubble, driven by speculation about the rate at which a fixed supply will be exhausted by a growing demand. Given supply remains fixed, at some future point, supply and demand will drive the price up, therefore owning some of that fixed supply will be of increasing value - someday. The things the speculators tends to miss are the possibility of substitutes for the good and the belief that recent measured global economic growth rates and related consumption rates could be extrapolated. Robert Shiller (economics professor at Yale, "Irrational Exuberance", and "The Subprime Solution") does a great job of explaining speculative price bubbles in goods like land and oil. A more reasonable forecast of future global economic growth rates and a reasonable expectation of growing availability of substitutes and offsets for oil demand would predict a much longer time horizon for exhausting the supply of oil than Peak Oil theorists and speculators would predict, and a much shallower rate of increase in average price.
November 14, 2008 at 10:03:00 AM PST
adt43wt342 said…
Bill,

thank you for the post. Yes, I believe the commodities bubble was the result of hot-money movement.

Where is it going next. It can hide in Treasuries for a while? We are talking about a 5T thing? Bring it on...
November 14, 2008 at 11:08:00 AM PST
adt43wt342 said…
Roy,

I was surprised too but there was a debate. I have to read up on how price is set in oil markets. I think it does involve a part of expectations which makes it a futures market. Futures are speculative, by definition.
November 14, 2008 at 11:12:00 AM PST
Anonymous said…
There may be quite a bit less hot money out there for quite a while, the result of de-leveraging, higher regulatory capitalization ratios, more entities subject to regulatory capitalization ratios, and sovereigns (especially China) investing more at home. That said, commercial paper and corporate bonds are going to look pretty attractive for awhile as liquidity fears dissipate and until spreads come back into line.
November 14, 2008 at 12:39:00 PM PST
Arthur B. said…
Over the past year (Nov 14 2007 to now), a troy ounce of gold has bought little as 6.3 barrels of oil and much as 13; 1:2. Oil went from a high of $145 to a low of $56 (1:3)

Over the last 18 years the oil gold ratio has been between 6.2 and 27.9 (1:4.5) while the price in dollar has been between 10.7 and 145.3 (1:13.6)

A big part of the volatility is volatility of the dollar, not the oil. True, gold supply depends on the price of oil, still.
November 14, 2008 at 1:32:00 PM PST
Stan Silvert said…
A few months ago during the days of the childish "drill baby, drill" debate, I watched a senate hearing on oil speculation. They grilled a panel of oil economists, some of whom worked for the petroleum industry.

Remember that famous tobacco hearing where all the tobacco CEOs pledged that tobacco was not addictive? They did that for these economists. The question was, "If we put in the proposed limits on oil speculation, how much will the price go down?" The most conservative estimate, even from the oil lackeys, was 40%.

"And if we enact this legislation, how long will it take that price to go down?" Answer: "About 30 days."

The congress passed legislation to let Exxon drill for oil on your kid's sand castle, but they never passed the speculation limits. However, the economists were right. As soon as the speculators were scared out of the market, oil dropped like a rock.
November 16, 2008 at 4:13:00 PM PST
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