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Get Used to It -- Sky-High Oil Prices Are Here to Stay

This ain't a bubble, folks. Better get used to it.

We've gotten a a little relief in recent days, but the stubborn upward spiral of oil prices isn't going to let up to any significant degree. Yes, there's some debate between economists and industry analysts who fall into two camps -- Bubble, Not-a-Bubble -- but the evidence suggests high prices are here to stay.

New York Times columnist Paul Krugman is firmly in the not-a-bubble camp. The only way for speculators to have a persistent effect on oil prices, he maintains, is if there is hoarding -- a tightening of supplies. There's no evidence of that. Oil inventories have remained at more or less normal levels throughout the recent run-up in prices.

Kevin Drum, from CBS News, agrees. He points out that the Energy Information Agency has been consistently wrong in its near-term forecasts for months now. The agency seems to insist that we're living in an oil-price bubble, but reality refuses to comply.

On the other hand, the United States is unquestionably in the midst of an economic slowdown. As demand for imported (read: Chinese and Indian) goods slows, it will weaken economies around the world. This will weaken the price of oil, which is used to ship all those goods from country to country to store shelves. So the stubborn price of oil must be a bubble caused by speculators.

Who are you going to believe?

There are signs demand is easing in emerging markets like China and India. Chinese demand for oil dipped in April and India's industrial production fell to its lowest level since 2002. Some analysts believe that this accounts for why prices have leveled off in recent days.

Peter Beutel of the energy-risk-management company Cameron Hanover believes the steep run-up since September has primarily been because of the Federal Reserve and the falling value of the dollar (oil is priced in dollars).

"Because we use 25 percent of the world's oil even though we only have 5 percent of the world's population, we'll always pay extra for that incremental barrel of oil when supplies are tight," he says. He believes the price of oil will probably peak by Memorial Day then ebb slightly, depending on the direction of the economy and what the Federal Reserve does.

So oil prices are in a bubble, thanks to speculation and the falling dollar, right?

"No," says Severin Borenstein, director of the University of California Energy Institute. "Real oil changes hands for real demand and real supply. And that price has to be pretty close to the futures' price or you're going to get a crash. So you could see a bubble going for a couple of weeks, maybe, if there was a real miscalculation in supply and demand. But you're not seeing that."

Borenstein maintains that the sustained rise in prices proves that supply and demand are currently aligned. He demurs on making forecasts about where the price of oil is headed.

Could oil fall back to those blissful days of $3 a gallon by summer? Not likely, for reasons that lie somewhere between the bubble, not-bubble camps. Chinese and Indian demand for oil has been rising in a relatively slow upward arc. These countries alone can't explain why oil prices have more than quadrupled over five years. And there's no question that supplies have tightened, but not enough to explain the high spike in prices.

Daniel Yergin, chairman of the Cambridge Energy Research Associates, explains that spare capacity is very tight. The oil market is vulnerable to crises. As a result, speculators are driving up the price. Tight capacity is one reason that, just today, the Senate handed the president a veto-proof vote to stop stockpiling fuel in the Strategic Petroleum Reserve over President Bush's strong objections.

So as the global economy slows, we may see a relatively sharp-but-brief downward drop as speculators get burned, then a slow easing of prices until the economy recovers. But in all likelihood, it won't last for long. High prices are here to stay.

http://blog.wired.com/cars/2008/05/are-oil-prices.html


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Added: May-14-2008 
By: PiRaTeCoPy
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