Why Oil Prices Will Tank

Discussion in '2008 Archive' started by KenH, Jun 6, 2008.

  1. KenH

    KenH
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    Why oil prices will tank
    Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong. Housing's boom-and-bust cycle tells you why.
    By Shawn Tully, editor at large

    NEW YORK (Fortune) -- High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.

    Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.

    But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb.

    The oil bulls are correct in their explanations of why prices have jumped. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

    But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.

    In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way. So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital."
    ...

    We've learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce.

    It's even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below.
    A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades.

    It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts.

    An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America's cupboards, of all places.

    And so it will be with oil. We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.

    - rest at http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/index.htm
     
  2. Ps104_33

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    Ohhhhhhh how I hope you are right. I can see it now. GM closing all their truck and SUV plants and oil going back down to $50 a barrell.
     
  3. billwald

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    Price goes up 10%. Sales go down 5%. Ergo, price to low.
     
  4. hillclimber1

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    I happen to agree with Mr. Tully's conclusion that it's gonna fall, but not to the degree he thinks. This high price has occurred do to misreading market forces, and to a small degree, profit driven moves by speculators. I like his point that huge supplies are mismanaged, such as in Russia and Venezuela, but America is also in large part guilty of the same, in ignoring known fields, and failing to allow building of new refineries. Until new refineries are built, we can't process more gasoline and diesel fuels, but increasing production would still have the desired effect of lowering market prices.

    The proposals in S. Dakota (I think) for the new mega refinery, is not being proposed by dummies. They know to a large degree what they can expect in profits by the time they come on line, and I'm betting they expect far more domestic production, as in, opening up new oil fields, or they would not consider the enormous investments in time, money, litigation and regulation.
     
  5. pinoybaptist

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    Forget the tundra.
    Dig Alaska.
     
  6. Ps104_33

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    Shouldnt those who believe in the global warming hoax regard high oil prices as a good thing? The higher the price the less we will use. The less we use the less greenhouse gasses and thus less global warming and the search for alternative sources of fuel will be more fervent. So high oil prices are a good thing. Right? What am I missing here? Why are liberals in Congress, who want to stop global warming, complaining about the high price of oil.​
     
  7. Cutter

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  8. billwald

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    Agree 100% with Krauthammer. I support a $2 tax to pay for the current oil war.
     
  9. hillclimber1

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    I sure would not support a tax. Getting the government even further mixed up in this, will make it worse. Just get legislators to facilitate the oil companies enterprises by putting up roadblocks to enviro's ever present litigious actions, and streamline the permitting process.

    If you had refinery to build and it should take 3 years under normal circumstances, but with all the red tape it takes 15-20 years, would you commit?
    I'd have to have assurances that a dependable supply of new crude were going to be available, and as of now, it isn't.
     

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