Thursday, October 16, 2008

Oil bubble has popped--excellent news

The popping of the housing bubble got us into this financial crisis, but now the popping of the oil price bubble may help us get out. Oil prices have dropped by more than 50% since they peaked last July! Arab Light has collapsed from a high of $143 in July to $62/bbl. today. Oil futures prices have collapsed from $145 to $69. This chart shows prices adjusted for inflation. In inflation-adjusted terms, oil prices today are cheaper than they were in the early 1980s. Considering that the U.S. uses about half as much oil today per unit of output as it did back then, oil is rapidly on its way to becoming cheap again.

This is just the latest example of how government is stupid. Now that the politicians have got everyone worked into a frenzy about how we have to eliminate our foreign dependence on oil, how we have to stop sending $700 billion a year to governments that support terrorists, etc., the problem has all but disappeared. The free market figured this out while the politicians were just coming up to the speed on the problem. Consumption has dropped, supplies and inventories have risen, and presto: problem solved. At least for now.


Jon S. said...

Do you think that energy mutual funds are still a good long-term buy, say for someone with a 10-year-plus time horizon?

CDLIC said...


I guess the only wild card is how OPEC will respond regarding upcomming production quotas.

Scott Grannis said...

Jon: Energy stocks are likely to get beaten up a bit more before they stabilize, since oil prices are likely to overshoot on the downside. Looking out 10 years I imagine that prices would be higher, as I think global demand for energy will remain very strong. But I'm not an expert on energy stocks, so take that with a grain of salt.

cdlic: OPEC has never been very effective at controlling oil prices. It will be hard to enforce a decrease in production while prices are falling.

Jon S. said...

Thanks for your answer, Scott. I think you're right about the short term, certainly looking out a year or so. But I have to believe that a balanced fund that includes companies in all aspects of oil-gas-coal (from exploratory drilling to refined product) will likely see a nice long-term upside. As you say, demand will continue to grow. Even if the West becomes less energy intensive, my guess is that the rest of the world will lag.