Tuesday, January 19, 2010

Is the Magically Deflating Oil Price All About Speculation?

I wrote this piece in 2009 when oil prices were very low. As oil prices continue to rise - perhaps back to their historic highs in mid-2008 - it's worth pondering these thoughts again. I think prices will in fact rise far higher than the 2008 levels by 2012 or so, but the timing depends very much on the timing of the recovery of the global economy. The bottomline is that the structural problems in the global oil supply system are still there, just masked by the global recession.

Question: Are speculators and Enron ex-employees behind oil price turbulence, as 60 Minutes recently asserted? Answer: No.

That line alone would be a tad short for an op-ed, so let me explain. 60 Minutes, the most popular and respected newsmagazine on television, devoted a segment on January 11 to dramatically declining oil prices. The show gave airtime to many commentators, all of whom argued strongly that the key factor in the run up of oil prices in the first half of 2008, and the precipitous decline since then, was oil market speculation. There was even a brief discussion of Enron's erstwhile employees and their continuing role in energy markets. The implication was that there may yet turn out to be some malfeasance in the oil price gyrations over the last few years.

60 Minutes opened the piece with a disclaimer about the complexity of the forces behind oil price movements. But then the show spent 15 minutes painting a very one-sided story about the reasons for oil price movements, with not a single dissenting view presented.

I agree that oil markets are highly complex. And I agree that at this point literally no one knows the full answer as to why markets have been on such a wild ride. But the sketch provided by 60 Minutes is only half the story, at best. The more complete analysis takes into account the fact that prices have been driven as much by supply and demand, and the perception of supply and demand, as by speculation. I'll unpack this statement below.

Read the rest at Energy Pulse.

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