Population Statistic: Read. React. Repeat.
Monday, December 17, 2021

Last year, analyst Ben Dell’s controversial assessment that oil prices were being artificially inflated via market speculation instead of supply shortages seemed to bear out when pump prices dropped toward the end of 2006.

Since then, of course, black gold’s $3-per-gallon-and-rising status has made a comeback. So hedge fund investors or no, expensive oil as a dwindling commodity is here to stay.

Or not. Portfolio’s John Cassidy argues that the rising cost of a barrelful simply resets the economics of global petroleum production, to the point where more players enter and prices eventually will be driven down:

When experts claim that oil is running out, what they really mean is that cheap oil is running out. About this, they may be right. Outside of Saudi Arabia, Iraq, and a few other countries, it is no longer possible to recover large quantities of crude for a dollar or two a barrel. But there are plenty of places where oil can be produced for $20 or $30 a barrel, let alone the $100 range where it has been trading recently…

With energy supplies expanding and the demand for oil showing signs of faltering, it won’t be very long before economic fundamentals reassert themselves. If oil were a normal commodity, competition would eventually drive the price down to a level close to the current cost of production, which at the margin is probably somewhere between $20 and $30 a barrel.

Of course, the oil market is hardly a textbook case of open competition: The OPEC cartel controls 40 percent of the supply, and geopolitics is an ever-present factor, as is speculation. The recent surge toward $100 a barrel was a dramatic demonstration of how traders can cause prices to become unmoored from costs for a lengthy period. But that also means that once market sentiment turns, the fall in prices could be just as dramatic.

All this depends on those competitive producers actually coming up with oil, instead of mostly dry holes. If they do pan out, we might see another years-spanning rollercoaster in fuel volatility.

by Costa Tsiokos, Mon 12/17/2007 10:44:49 PM
Category: Politics, Business
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