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Oil will go to < $100/barrel
The price of a barrel of oil has dropped almost $15 in the last 9 days. That's like 10% drop in a week!
I can't stop thinking about a editorial that ran in the WSJ three weeks ago about the role of "perception" in the oil market, by Martin Feldstein. Nutshell: Dr. Feldstein said that the perception of higher oil prices (at that time it was $140) drives speculation and pushes our prices higher, not demand. But, that some simple changes in perception will cause the price to sink and that price change will will then trigger a larger supply. He's the economist so I'll quote him:
"When will an owner of oil reduce production or increase inventories instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise...
...Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.
Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply."
So how has perception changed? Well, it looks like we may get drilling in the US at some point in the future. "May" and "some point". Very powerful words - 10% drop!
The airlines drop flights. JoshJS sells his car. People stop driving to starbucks. SUV sales are in the dump (used small cars currently sell for more than similar mileage used SUVs).
Huge changes in US demand caused what? The price to continue to go up! But the annoucement that the US may start drilling at some point in the future and the price drops 10%!
I spoke to my dad about that editorial tonight. Of course he perfectly summarized the article. He also added: "I bet that oil is under $100 soon". Interesting bet.
Again if you have a subscription to the WSJ online, go read that editorial. It was great.
