Economic Short Term Memory
September 21st, 2006 by Grant in: Economics, Oil & GasA quick quote from the recent BusinessWeek:
“Cheaper oil is helping to offset a cooling housing market and may persuade the Fed to hold off raising rates through the fall”
It’s interesting how quickly we forget how cheap oil really was just two and a half years ago. At the end of 2003, a barrel of crude oil sold for under $30 per barrel. Over the last several months, we’ve seen a plunge (as BusinessWeek calls it) of over $13 per barrel, and they question how low oil prices can go! They even have a cute little chart with a gasoline hose portraying the downward slope of the price of crude.
What they don’t show you is the rocket ship-like trajectory that put us in a position to be speculating on whether oil can get any cheaper than $60 per barrel!
It’s truly amazing how short our economic memory is.
Another example: The frenzy at the gas pumps just days after hurricane Katrina hit.
Gas prices went to $3 nearly over night on worries that mother nature had so damaged our supply line with black gold that people were tanking up ever night because the price would surely go higher tomorrow. Mass chaos I tell you!
Fast forward to September 21, 2006. Gas prices have been at or above $3 per gallon and no one seems to bat an eye.
Another quote from the BusinessWeek article:
“Don Casturo, head of oil trading at Goldman, Sachs & Co. in London, says oil could fall an additional 5% to 10% before hitting bottom.”
Wow! Fall an additional 10% before “hitting bottom”!
Today’s closing price of just over $61 per barrel puts “bottom” at just under $55 per barrel. Still $25 above where we were in 2004.
Interestingly enough, the article tells me that not only have we forgotten what we were paying for oil just over three years ago, we have also accepted these levels as the normal, every day price for crude.
A year ago we were still talking about how high oil prices could go…
Now that we’ve accepted the new highs, we’re on to talking about how much they could drop.
Additional Resources
Crude Oil 3-Year Chart
Strategic Oil Reserve Inventory
Current Oil Futures Prices
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September 23rd, 2006 at 1:59 pm
Good post. It is always good to look at any pricing or economic issue through the lens of at least 5 years if not longer. The fact that this article didn’t talk about the reality that oil has tripled in price since Bush came to office or that oil, at $60 a barrel is - not adjusted for inflation - 20 times more expensive than 33 years ago, is really reflective of the short-term, attention deficit, chicken little aspect of the media.
As you know Grant I full believe that oil is on an ever upward pricing trend and that it will be ove $100 by the time we get a new president. I also predicted here during the summer that the price of gas would most definitely drop before the election. Check it out!
David http://www.evolutionshift.com
September 24th, 2006 at 10:29 am
You’ve got a good point, David. If you look even further back than the three year chart I have in the post, you’ll see that oil prices were declining all through 2001 until just before ‘02.
I’m not sure that you can correlate the price of oil directly with Pres. Bush, because oil was actually on a downward path until 9/11 at which point it’s done nothing but gone up.
And remember that between the beginning of 1999 and the middle of 2000, oil prices went from just under $15 to just under $40. And that was during Pres. Clinton’s term.
The problem is that it’s extremely difficult to attribute a price trend to a sitting president without having to account for many other global factors.
I think you’re right, we’ll probably see a price spike before the next elections, but I don’t think it’ll go to $100.
We’re starting to see the “shoulder” effect of oil prices. In essence, we’re at about the same price at the end of summer (and peak driving season) as we were before summer. Just like clockwork, oil prices have come down when demand tails off…
September 24th, 2006 at 7:25 pm
Is it demand that is causing the summer plateau in gasoline prices? I think it has more to do with the requirement to oxygenate gasoline during summer. Thanks to the Energy bill passed by congress, the only real option for meeting this requirement is ethanol. The Ethanol supply/demand situation was ridiculous when oil companies had to switch to summer blends. Now that we have switched back to winter fuels all those ethanol IPO are struggling. Expect to see another (smaller) spike in gasoline prices when gas stations return to summer blends next year.
September 24th, 2006 at 8:28 pm
That’s a great point, Rajesh, and it’s hard to differentiate between price increases caused by demand and increases caused by regulationary changes.
While I think the oxygenation requirement does contribute to the price increases, demand causes the brunt of the increase.
It’s a good observation you’ve made noting the recent drop in ethanol stock prices and the demand drop in demand for ethanol additives.
My hunch is that while ethanol stocks will drop a bit, they won’t go through the floor. There has been a lot of hype behind ethanol, and while I think it’s contributions to curtailing the need for foreign oil are grossly exagerated, it does have it’s strong points in lowering polution.
Thanks for contributing, and feel free to share your thoughts anytime. You seem to have an eye on the ethanol/oil markets.
-Grant
September 27th, 2006 at 8:44 pm
[…] The other day I wrote a post about how consumers are labeling the latest drop off in oil prices as a “plunge” of a whopping $12 per barrel, even though this type of retracement is typical for this time of year. […]
March 14th, 2007 at 8:07 pm
[…] seems our short term memory is getting the best of us (again). It was just over 30 years ago that scientists were warning us […]