December 13, 2007
Oil shock
Another vote of thanks to James Hamilton (principal author of Econbrowser and an economics professor at the University of California, San Diego): I cite him again in this column for The Atlantic on the impressive irrelevance (for now) of the price of oil.
The oil market is not a bubble–fundamentals of supply and demand, not self-reinforcing speculative frenzy, are driving prices–but nonetheless I am intrigued by the fact that the dearer the stuff gets, the calmer we appear to be about the economic implications. That thinking has bubble-like characteristics. You recall how fears about irrational exuberance in the stockmarket were more to the fore in 1996 with the Dow at 6,000 than they were a few years later, after it had risen another 4,000 points. Accustomed to an oil price that would have seemed terrifying very recently, we now seem to worry less, the higher it goes.
Financial bubbles often do not burst until the last skeptics—the ones who called them bubbles early on, and rolled their eyes as speculation raged—have capitulated to the mania and bought in. Once nearly everyone is convinced that the rise in prices has some real economic foundation after all, and not before, the whole thing goes pop. The pattern repeats over and over. A parallel suggests itself. When even the people who were worried about $40 oil have stopped worrying about $100 oil, it may be time to panic. As the price of oil goes ever higher, we seem to get ever less anxious about it. In the June 2006 Atlantic, I explained why oil at more than $50 a barrel was having so little effect. But now it’s almost double that. What ought to be obvious might therefore be worth restating: The higher it goes, the more likely it is do real harm.
You can read the rest of the article here.
Interesting article and well argued. It would seem that the value of far forward oil futures out to 2015 which run around US$78-80 in current dollars further supports your argument.
Posted by: luctoretemergo | December 14th, 2007 at 6:26 pm | Report this commentThe US imports somewhat between 54 to 60% of its oil. The second largest importer over the recent years has been Mexico. The biggest oil field in Mexico (Cantarell) is in decline. The IEA (International Energy Agency) reported earlier this year that non-OPEC oil is in decline. According to the most recent report by the Energy Watch Group (as referred to in a slide presentation by Simmons and Company) oil supply peaked in 2006. They see a steep decline in oil supply, from 81 mmb/d in 2006 to 58 mmb/d in 2020 to 39 mmb/d in 2030. Dr Sadad al-Husseini, formerly Saudi Aramco’s Executive Vice President for Exploration and Producing, said that “the top 38 giant fields of Arabian Gulf are in total 41% depleted” (from Oil and Money presentation on October 30, 2007, as noted in Simmons and Company slide presentation).
Given these kinds of indications, I would say that what we are experiencing now is only a beginning. We are not preparing for a serious situation happening in the not too distant future. So, although I am happy to see this article, I still think it is relatively calm given what the potential that such a crisis would bring upon the world economy. While we can seriously reduce our usage with a sustained effort, we are still very dependent for our survival on this substance in our current world. We need to make a sustained and coordinated effort to reduce usage, especially in the US. There would be no market solution in an extreme crisis.
Posted by: Bill Goedecke | December 15th, 2007 at 6:39 pm | Report this comment