Oil Prices

The unprecedented rise in oil prices from 100 dollars to almost 150 dollars a barrel over the past six months has stoked speculation over the possibility of oil hitting 200 dollars in the near future. Call options for oil at 200 dollars a barrel doubled in trading over the past month and more companies are buying long term contracts locking them into high oil prices, an indication that the market anticipates further oil price increases. Such an outcome would devastate the world economy, especially the automobile and airline industries, and would cripple American consumers.

Snapshot asks, how much of this unparalleled increase in prices is due to speculative fever as opposed to market forces?

Businessweek - What If GM Did Go Bankrupt...
Market Watch - Allianz predicts oil price of $200 barrel in next 2 years
Financial Times - Bets double on oil hitting $200
Wall Street Journal - Oil's Rapid Rise Stirs Talk of $200 a Barrel This Year

Saudi Arabia reported that it plans to increase its oil production in July by almost half a million barrels a day in an attempt to reign in the long running spike in oil prices that left oil trading at nearly $140 dollars in early trading on Monday. It is unclear whether this ambitious effort will succeed. While Saudi Arabia is by far the largest single producer of oil and played an influential role in previous OPEC machinations, strong demand growth in China and India has left it with little spare capacity available for sudden increases. It must instead rely upon costly and time consuming exploration and exploitation of new reserves. Even with a fourth of known global reserves, Saudi Arabia faces an uphill fight to bring down the sky high prices of the past year.

Snapshot asks, will global oil demand growth abate enough for Suadi Arabia's gamble to work?

Wall Street Journal - Saudi Arabia's Leverage in Oil Market Is Sapped
Financial Times - Oil hits new record near $140
New York Times - Plan Would Lift Saudi Oil Output
Financial Times - Saudis consider boost in oil output

The International Energy Agency is preparing to release a report that will sharply downgrade forecasts of future oil supplies, mainly due to restrictions on capacity investment by oil exporting governments. It also projected growth in global demand of 1.2% this year as reductions in the U.S. and Europe are more than offset by strong demand growth in India, China, and the Middle East. News of the report helped push oil over $135 a barrel in Thursday trading and is likely to fuel argument that price increases are a product of long term structural change and not short term financial speculation.

Snapshot asks, can OPEC be pushed to invest in more than token capacity expansion?

Wall Street Journal - Energy Watchdog Warns Of Oil-Production Crunch
Bloomberg.com - IEA Plans to Lower Oil Supply Forecast in Next Annual Report
New York Times - New Fears on Long-Term Global Oil Supplies
Bloomberg.com - IEA Is Studying Output Depletion at Oilfields to Gauge Supply
International Herald Tribune - International Energy Agency urges OPEC to produce more oil

Oil went to $100 this morning, although apparently only one actual trade happened at that price. Likewise, the supposed boogeyman of $100 oil turns out to be a bit anticlimactic.

Remember those "try your strength" games at the carnival where you swung a hammer as hard as you could to ring a bell? I never got past the "wimp" or "pipsqueak" rating no matter how hard I swung, but the bell always beckoned at the very top of the scale.

Today, we are very close to that bell : $102.81 (in current dollars) is the highest price paid for oil, in 1980, after the Iranian Revolution. We could potentially ring the bell tomorrow, and then what? For the past several years analysts have been expecting that high prices would give way to lower prices by increasing supply and encouraging conservation but the price of oil has risen from $10 in 1997 to around $25 in 2002 to $100 now while demand continues to dog supply.

So my guess is that once we ring the bell, we'll just keep raising that bell, to $105, $110, until we actually feel pain and start conserving. And that eventual number could be a lot scarier than $100 oil. If you measure oil price by a more experiential Richter-type measure, you know that the price of oil doesn't feel as bad as it did in 1980, and that feeling is actually somewhat accurate. CAFE standards have made vehicles more efficient so that gas costs are a smaller part of middle class incomes than in the 1970's--which means they don't hurt as much as they used to.