Tuesday, August 26, 2008

Oil drops to $113 a barrel

Speculation was the thing that drove it, of course. And as soon as people started to realize that, the speculators bailed. Lo and behold, there really wasn't much of a crisis, now was there?The Economist says that this is bad for us:

Now, there are several schools of thought. There's the one that says that when you use less oil, the demand and the price drops.
If speculation is to blame for the high oil price, then higher interest rates, not lower ones, may be warranted, at least in the medium term. Cheap money, after all, results in expensive assets, as the bubble in stocks then houses showed. In a research note published last month, Marco Annunziata of UniCredit argued that once the current crisis is over, central banks may return to the "unfinished job" of restoring interest rates to a less bubble-blowing level.

That the oil price may be so high because interest rates are so low is also an argument long pursued by Jeffrey Frankel of Harvard University. He points out that rates now fail to compensate savers for inflation: real interest rates are negative. As a result, the return to pumping a barrel of oil, selling it and investing the proceeds is often less than can be gained by leaving the oil in the ground and waiting for its price to rise further.
Then there's the reality that speculation was the likely culprit--and I think that's true because, as soon as they moved against it, the prices dropped dramatically. The rapid fall in prices suggests not a gradual decrease in demand but rather an artificially inflated "bubble" created by greed:
"$100 oil isn't justified by the physical demand in the market.  It has to be speculation on the futures market that is fueling this." - Clarence Cazalot Jr., Chief Executive Officer, Marathon Oil (October 2007).

"The price of oil should be about $50-$55 per barrel."
- Stephen Simon, Exxon Mobil Senior Vice President (Senate Judiciary Committee April 1, 2008)

"The price has nothing to do with a shortage of oil. There's a lot of oil on the market. It's because of speculation and OPEC cannot control speculation." - Abdullah al-Badri, OPEC Secretary-General (Agence France-Presse June 11, 2008)
Take your pick...

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