Oil Prices: Must They Go Up Because Charlie Gibson Says So?
Brian Doherty | January 9, 2008, 7:18pm
Charlie Gibson stated at Saturday's GOP candidate debate that "intellectual honesty" required admitting oil prices can only go up. Cato's Jerry Taylor thinks the evidence suggests that those with most to gain or lose from accurately predicting oil price fluctuations seem to think the opposite:
Oil prices might indeed be on a rocket ship upwards for as far as the eye can see, but market actors don’t think so. At the New York Mercantile Exchange, oil for delivery from next month through December 2016 is showing a downward price trend. In short, the people with the most money on the line - who will live and die (economically speaking) by these assessments - aren’t buying Gibson’s assertion about the future.
More evidence can be found the behavior of oil inventory holders. At present, oil inventories are being released to the market –hardly what one would expect if inventory holders thought that oil prices will continue their long march upward.
Ron Bailey from our May 2006 issue on the "peak oil crisis."
Casey Khan | January 9, 2008, 9:53pm | #
I like Jerry Taylor quite a bit. He's a really good energy analyst, and if I'm correct, I think he rightly predicted the California power crisis would occur in the way that CA reregulated its market power market.
While I think his conclusion is correct, mostly b/c predicting market direction is anyone's guess, but using the forward curve the way he does to argue that prices will drop in the future misses the mark.
The crude forward curve is in a state of what is called "backwardation" mainly because supply is tight with projected demand. 2016 prices aren't lower merely because traders are betting that 2016 are going to be lower than the current spot month by 2016. Rather, it is b/c 2016 crude is currently less competitive than 2008 crude, hence the higher prices at the front end of the curve to the back end of it.
If anything, what a "backwardated" forward curve is telling us is that prices will likely go higher, because it is telling the crude market to consume like hell. And so it has. Crude has been in this backwardated state for more than three years now and prices have skyrocketed. If spot prices were lower than forward prices, then the market would be telling us to store oil and consume it later, this is called "contango." In any case, forward curves are telling us whether there is consumption or saving/production generally occuring in the market. This all stems from individual time preferences of producers, consumers, and speculators.
So yes, it is not necessarily intellectually dishonest to say that oil prices may drop, but not for any of the reasons stated by Taylor.
Still, by far, Ron Pauls answer was the best in being intellectually honest by essentially arguing, that all else equal, if you keep printing money the way we are, the value of the dollar compared to oil, gold, bread, will continue to drop.
