Oil price is all hype

Oil price is all hype

Basic economics has taken a back seat to the oil debacle. Inflation-adjusted oil is about 140% more expensive than it was 12 months ago. But, are we just seeing another example of what’s happening in real estate right now. A year ago, wait, 4 months ago, everyone was saying that real estate would just carry on going up. No, said I. Markets don’t rise indefinitely. Now we’re having a crash. Which is good, because in a year I’ll buy some houses.

Oil is a market like any other, and basic economics says that the price of oil should be no more than the cost of producing the most expensive barrel of oil – that means supply/demand is working efficiently. Except it’s not working efficiently. The most expensive barrel of oil at the moment is from the tar sands in Canada – it costs somewhere around US$70/barrel. But the price of crude hit US$140 overnight. Someone is making a lot of profit. And where there’s a lot of profit to be had, other players jump in and reduce the margins until the price comes down to something more normal.

What is driving the price at the moment is that Chavez has cocked up Venezuela’s oil production since he nationalised it; Iran can’t attract and foreign investment; Nigeria is totally rooted and corrupt; and China and India seem set to continue their inexorable growth. So, supply looks shaky, yet demand continues to rise. The other factor to consider is that there are processes that will convert coal to oil. America has 300 years’ supply of coal, which would make it self-sufficient for ages. Suddenly the demand for oil will drop. It’s already dropped over 400,000 barrels per day in developed countries since last year – a result of plummeting US demand.

Even ignoring spectre of coal, the oil market is long overdue for a nasty and severe correction. I said six months ago when oil reach US$100 a barrel that it should drop to US$45. But I was early; the same way I was early getting out of property in 2005. But, better to be early and take a profit than late and lose a lot.

Basic economics has taken a back seat to the oil debacle. Inflation-adjusted oil is about 140% more expensive than it was 12 months ago. But, are we just seeing another example of what’s happening in real estate right now. A year ago, wait, 4 months ago, everyone was saying that real estate would just carry on going up. No, said I. Markets don’t rise indefinitely. Now we’re having a crash. Which is good, because in a year I’ll buy some houses.

Oil is a market like any other, and basic economics says that the price of oil should be no more than the cost of producing the most expensive barrel of oil – that means supply/demand is working efficiently. Except it’s not working efficiently. The most expensive barrel of oil at the moment is from the tar sands in Canada – it costs somewhere around US$70/barrel. But the price of crude hit US$140 overnight. Someone is making a lot of profit. And where there’s a lot of profit to be had, other players jump in and reduce the margins until the price comes down to something more normal.

What is driving the price at the moment is that Chavez has cocked up Venezuela’s oil production since he nationalised it; Iran can’t attract and foreign investment; Nigeria is totally rooted and corrupt; and China and India seem set to continue their inexorable growth. So, supply looks shaky, yet demand continues to rise. The other factor to consider is that there are processes that will convert coal to oil. America has 300 years’ supply of coal, which would make it self-sufficient for ages. Suddenly the demand for oil will drop. It’s already dropped over 400,000 barrels per day in developed countries since last year – a result of plummeting US demand.

Even ignoring spectre of coal, the oil market is long overdue for a nasty and severe correction. I said six months ago when oil reach US$100 a barrel that it should drop to US$45. But I was early; the same way I was early getting out of property in 2005. But, better to be early and take a profit than late and lose a lot.

« | »

Let us know what you think

Loading Facebook Comments ...

Road Tests

Silver Sponsors

Car and SUV Team

Richard-Edwards-2016Richard Edwards

Managing editor

linkedinphotoDarren Cottingham

Motoring writer

robertbarry-headRobert Barry

Chief reporter

Ian-Ferguson-6Ian Ferguson

Advertising Consultant

debDeborah Baxter

Operations Manager

RSS Latest News from Autotalk

RSS Latest News from Dieseltalk

Read previous post:
The government doesn’t care about high fuel prices, it likes them

The spin doctors in the government will implore the politicians to look gravely concerned at the price of fuel and...

Close