One of the hottest topics in the news these days is the price of oil, whether the story is in the form of the new high futures contract reached today:
NEW YORK (AFP) — Oil prices spiked to new highs Tuesday in the latest frenzied trade driven by concerns over violence in key producer Nigeria and the weak US currency.
New York’s main oil futures contract, light sweet crude for June delivery, leapt as high as 122.73 dollars per barrel, an all-time intraday high, before settling to a closing record high of 121.84 dollars, up 1.87 dollars.
London’s Brent North Sea crude for June also reached an all-time high at 120.99 dollars a barrel, before slipping back to settle at a new high of 120.31 dollars for a gain of 2.32 dollars.
Runaway oil prices have almost doubled in the past year and have surged by more than 20 dollars since the start of 2008.
“Market headlines are dominated by the impact of currency fluctuations, geopolitics in the form of actual and potential threats to supply in Nigeria, Iraq and Iran, plus better-than-expected recent US economic data,” said Barclays Capital analyst Kevin Norrish.
“Of these three drivers, we think it is supply losses that are the key driver at present.”
or diseconomic campaign promises being made and fought over:
Hillary Clinton’s proposed gas tax holiday is not, in my view, a good idea. But the furor over what is, when all is said and done, a small and temporary policy proposal is entirely disproportionate. What’s going on?
Part of it, clearly, is the fact that many people in the media really, really want Obama to win and Clinton to lose — read Kurt Andersen — and have seized on the gas tax as their latest proof that she is ee-ee-vil.
But there’s also something going on with economists, a phenomenon I recognize wearing my other hat: the tendency to place excessive weight on issues where professional judgment differs from lay opinion.
There are other people who are much better qualified and more knowledgeable than I to comment on this and I’ll see if I can’t rattle some of their cages but my understanding is that the world oil market is quite responsive to changes in supply and demand. It responds very quickly to changes both up and down.
There seems to be a theory about the market for oil around that I’d characterize as the “Big Pool of Oil Theory” i.e. somewhere there’s a big pool of oil sitting around and all that’s necessary to lower oil prices is to pry it loose from the fingers of those who are keeping it from coming to market. Here’s an example of that theory from the comments section of a prominent blog this morning:
We have more crude stockpiled now than at any time in the last 15 years, even absent the national reserve. We also ahve more distilates… such as gasoline and Diesel/Jet fuel on hand than we have had at any point in the last 15 years. The fundimentals are not there for $70/bbl, much less $120/bbl. When this thing breaks, it’s going to break bigtime.
in response to this question:
What are the odds that crude prices are a bubble? You know, that traders keep increasing prices because prices keep increasing instead of for any logical reason. I’ve seen thinking get out of phase with reality in the past, and I’m beginning to suspect that might be the case now.
In answer I’d like to direct your attention to a lengthy, highly technical article at The Oil Drum. The gist of the post, as you might expect from TOD, is that Saudi oil has probably peaked. Here’s a graph from the post of annual Saudi oil production that illustrates the point pretty well:
Click on the image for a larger version.
Does that look like prices have spiked over the last year or so because supply is being held back? Me neither.
Probably not, but there is a missing number: how many wells were in operation over that time period. Since the vertical axis is barrels/well/day, without knowing how many wells are in operation, we cannot know whether the supply is increasing or decreasing.
The linked article goes into the matter a little more, Jeff, but the number of operating wells isn’t rising particularly fast. For example, here it says that they opened 33 new wells over the period 1995-2004. And here there’s a graph showing total production. Here’s another graph showing total production being fairly steady.