Oil is Peaking, But Not Because of Speculation

[Terry in Austin]

A http://www.thecuttingedgenews.com/index.php?article=11465&pageid=&pagename=">bigger-picture view of the recent run-up that goes against the conventional wisdom.

In seeking to explain the run up in oil prices from 2004 to 2008, commentators often turn to ‘speculation’ as the primary cause. While speculation—or at least a kind of piling-on—may have explained the very late stages of the oil price rally, the willingness to attribute oil prices primarily to financial investors... risks drawing the wrong lesson from the period.

...oil production plateaued in October 2004. Regardless of the price level, the oil supply simply stopped responding, and from then on, the world had to make do with broadly flat supplies. Ordinarily, ...an inelastic oil supply might have been expected to hinder economic development. It didn’t. In the four years to mid-2008, the world economy expanded by 18 percent. The global economy boomed, even without new oil.

However, this came at a price. ... price rises averaging 25 percent per annum from 2003 to the end of 2007. ...proved a workable solution for a time, but the global economy could not sustain 25 percent annual price increases indefinitely, and by second half 2007, the situation was becoming critical. ...virtually every producer, with the possible exception of the Saudis, was running flat out. ...Prices did ultimately fall, but not because the supply situation eased, nor because speculators fled the market, and not because inventories were released. Prices fell because the global economy collapsed.

This period then shows us two of the possible adjustment mechanisms in the era of peak oil: oil-less growth characterized by increasing prices and continuous, incremental adjustment; and recession accompanied by a dramatic steep drop in consumption and a collapse of oil prices. ...Ultimately, the inability of the oil supply to keep pace with global demand proved to be a key contributing factor to the current recession. ...Were China not so large and not at its current stage of development, peak oil might have come and gone without anyone noticing for some time. As it was, China hit its stride just as the oil supply was stumbling. The issue was not, therefore, peak oil in and of itself, but rather the supply/demand imbalance caused by the inability of the global oil supply to adjust to China’s incremental demand.

[TreasonousBastard]

1. That sounds reasonable...

speculators and bubbles be damned, eventually the equilibrium price is approached-- the Gods of Microeconomics will not be mocked. Speculator runup, after all, was based on future short supplies, which eventually proved not to be the case. So far.

Recovery will mean the supplies will be stretched again, speculators will once again run up the price, and we'll see gas prices we can't afford, plastics fabricators run out of business, and maybe another recession.

US futures exchanges might have new rules hitting them to avoid the runups, but there are enough foreign exchanges to cause trouble.

(My personal fantasy is that anyone who buys a futures contract be required to actually take delivery of the gasoline, pork bellies, orange juice, or whatever else they play with.)

[jimlup]

2. And when the inevitable shit does hit the fan...

Its going to be messy.

[TheWraith]

3. That's simply not true.

Oil costs have nothing to do with demand or supply: we're sitting on a worldwide glut of oil right now. The only thing holding up prices is the fact that the oil is the Enron loophole and the opportunities for paper manipulation it creates.

[Terry in Austin]

4. So the conventional wisdom goes, anyway

And that's exactly what the author is making a case against.

One point he makes is that the temporary "glut" doesn't count for much in the bigger picture. People profiteering from the end game is essentially a side-show.