Oil Prices: Must They Go Up Because Charlie Gibson Says So?

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."

Comments

[Charlie Gibson]

yes

[Crusader Rabbit]

Charlie Gibson, one of the world's most prescient and insightful analysts of future energy markets.

[SIV]

Supply/demand

You can't expect a layman MSM electronic journalist to understand such a specialized technical "theory".

[Mike Brewer]

Well, according to a recently smeared economics wizard I know:
The price of Oil hasn't gone UP, the dollars gone DOWN.

A quick look at the numbers confirms this.

[joe]

It worked with his hair.

[crimethink]

I liked him better when he was tasting Julia Child's cooking on Good Morning America.

[MikeP]

Oil Prices: Must They Go Up Because Charlie Gibson Says So?

* Signs point to yes.
* Yes.
* Reply hazy, try again.
* Without a doubt.
* My sources say no.
* As I see it, yes.
* You may rely on it.
* Concentrate and ask again.
* Outlook not so good.
* It is decidedly so.
* Better not tell you now.
* Very doubtful.
* Yes - definitely.
* It is certain.
* Cannot predict now.
* Most likely.
* Ask again later.
* My reply is no.
* Outlook good.
* Don't count on it.

[J sub D]

I agree with MikeP. But really, doesn't everybody?

[thoreau]

Anybody who thinks oil prices could continue to rise has no faith in the free market capitalism of the Persian Gulf, Venezuela, and Russia.

😉

[someone like joe, but with oil]

Hey!

[buck smith]

Well, according to a recently smeared economics wizard I know:
The price of Oil hasn't gone UP, the dollars gone DOWN.

The dollar drop 10% against the euro over 2007. Oil has gone from $55 per barrel to $95.

[Umbriel]

The dollar is probably a factor in the oil price, but I don't see it recovering soon. On the other hand, current conventional wisdom has it that a recession is looming. One would expect that to reduce oil demand, and therefore price.

[SIV]

MikeP,

Excellent technical analysis of the commodities market. Now if their was only some sort of program--or machine-- that could provide just one specific piece of that analysis at a time.........

[Casey Khan]

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.

[joe]

So the price of oil hasn't gone up in Europe, China, or South America?

[J sub D]

So the price of oil hasn't gone up in Europe, China, or South America?

Less so in their currencies. But still up.

[Lost_In_Translation]

I was a little skeptical about Paul's answer, probably because I'm not a gold bug, but its hard to compare one commodity to another.

I probably lack the sophistication and economic background.

[Casey Khan]

Yes, less so, but still up, and still backwardated. I think you'd still see backwardation if you priced crude in ounces of gold.

[ed]

I agree with MikeP. But really, doesn't everybody?

No. Sorry.

[Casey Khan]

"I was a little skeptical about Paul's answer, probably because I'm not a gold bug..."

First, I'm tired of all the aversion to gold bugs. Better a gold bug than a central banker [yes central banks are socialist institutions].

Second, you don't need to be a gold bug to understand that the Fed is printing money like a banana republic. Just ask the same traders on the NYMEX and they'll tell you that the plummeting dollar is a substantial factor in the change in the dollar-oil price. A couple months ago I was talking to a energy hedge fund manager who I know to be a complete Keynesian who thinks oil's up so much in the US mostly because the dollar is crap.

Heck, a month ago pit traders at the CBOT were cheering Paul and heckling Bernanke's insane monetary permissiveness. I wouldn't necessarily call these guys gold bugs.

Paul's explanation may not fly in DC, but it's a similar explanation that is being chattered about on Wall St and La Salle St.

[Record high]

uhh, oil prices are over $100/barrel...that's the highest they've ever been.

[zig zag man]

Oil Prices: Must They Go Up Because Charlie Gibson Says So?

* Signs point to yes.
* Yes.
* Reply hazy, try again.
* Without a doubt.
* My sources say no.
* As I see it, yes.
* You may rely on it.
* Concentrate and ask again.
* Outlook not so good.
* It is decidedly so.
* Better not tell you now.
* Very doubtful.
* Yes - definitely.
* It is certain.
* Cannot predict now.
* Most likely.
* Ask again later.
* My reply is no.
* Outlook good.
* Don't count on it.

I would like to subscribe to your newsletter.

[Mo]

Yes, less so, but still up, and still backwardated. I think you'd still see backwardation if you priced crude in ounces of gold

That's because gold is near record levels. Gold prices are cruisin' for a bruisin'.

[Francis]

Gold prices are cruisin' for a bruisin'

Pls explain, Mo. Thanks!

[Jew Banker]

Gold prices are cruisin' for a bruisin'.

Our position in the metal is weak for current market conditions so we intend to manipulate the price down via index changes and margin calls and reposition strongly for our pending dollar devaluation.

[Ebeneezer Scrooge]

Bah humbug.

On the relative scale of hours worked per barrel of oil, the price will probably go down in the long run [reasons: we keep finding new oil deposits every decade, and we get better at extracting crude every decade]. Unless McCain wins and we invade Iran AND Pakistan.

I do not believe "McCain" is a recognized economic variable. Yet.....

PS: I do not ascribe to the "oil is made out of dead dinosaurs and the supply is fixed" theory. Far more likely that the earth is continuously producing oil, at an as yet unknown rate. Dinosaurs maybe made a big lump sum deposit, but it's not the only depossit.

The dollar is probably a factor in the oil price, but I don't see it recovering soon.

We should ask MikeP to define "soon". Then we'll known for sure.

But what I don't hear anybody talking about is the impact of the Euro on the dollar. All of a sudden we've got this new "economic entity" to compete with the US. The market is going to have to adjust to that reality, and I believe that is a major factor in the current international valuation of the dollar.

In the long run, US economic growth will outpace European economic growth. Unless Hillary wins and we socialize medicine AND energy.

In which case Hillary Clinton will become a recognized economic variable.

Barring the commission of complete economic suicide in the US (not impossible), I predict that in the long run the US dollar will regain its old strength and status.

[Ebeneezer Scrooge]

btw, it's also true that politicians print money like it's free, because for them it actually is. This happens every time there's a war, the printing presses are a get out of jail free card.

This is another factor in the international valuation of the US dollar.

So this isn't to say RP is all wet, just that there are other factors.

But MikeP already KNOWS this. Bless his omniscient soul.

[Gilbert Martin]

"Charlie Gibson stated at Saturday's GOP candidate debate that "intellectual honesty" required admitting oil prices can only go up"

Intellectual honesty for MSM talking heads would require pointing out that catering to the eco-socialist wackos by preventing drilling in ANWAR, off the coasts and development of oil shale in the western U.S. has restricted oil supply and put upward pressure on prices.

[James Ard]

Scrooge, my dad convinced me with chemical formulas that oil and carbon based life are different. As a plasma physicist he may not have been qualified to explain it. But, I'm convinced life came from oil and not the other way around.

[R C Dean]

Petro-geologists will tell you that there are some oil fields that seem to be self-replenishing, which would seem to be inconsistent with the dinosaur theory of oil formation. Still, at this point I don't think anyone really knows.

[Mo]

Francis,

Here is the gold price chart for the last 30 years. Keep in mind, this is not inflation adjusted.

There are a couple of reasons.

The first is simple supply and demand. There's only so much gold in the ground. Mining companies mine for gold as long as it's economically viable to do it. A lot of the cheap, easy reserves are being reduced. And unlike oil, most gold price pressure is due to investors and speculators rather than industrial and consumer purchases.

Which leads me to the second part. Gold is a safe haven investment. When there is economic uncertainty, like the current credit crunch and recession fears, there is significant flight to safety, in this case gold. That's why the price has jumped almost $250 since the mortgage crisis started hitting. Gold will likely continue to rise slightly through the instability. However, once we start nearing a bottom, investors will pull their money out of gold and put it in more productive investments, like stocks and corporate debt. I say gold will likely stay relatively high through the fall and then will fall hard.

I'm not saying now is necessarily a good time to short gold, but it's definitely not a good time to buy it.

[Legate Damar]

Mo,

MikeP doesn't write his own newsletter, so I'll sign up for yours instead.

[Ebeneezer Scrooge]

James,

I'm convinced life came from oil and not the
other way around.

Interesting idea. This is an angle I hadn't considered.

But then, were does oil come from?

[James Ard]

The mantle? the core? I'm not sure except I think it can be deeper than decayed life.

[Francis]

Mo: I'm not saying now is necessarily a good time to short gold, but it's definitely not a good time to buy it.

I agree.

[Russ 2000]

I agree with MikeP. But really, couldn't everybody go for an eightball now and then?

[de stijl]

Mo,

MikeP doesn't write his own newsletter, so I'll sign up for yours instead.

Mo is their leader.

[Warmongering Lunatic]

As to whether the price of oil must go up, we can note that all the oil companies are betting that the price will come down. Otherwise, they'd be busy building duplicates of Sasol's Secunda, to convert coal into liquid fuels. At current or higher prices, the profits would be significant; the risk is that oil drops below $40-a-barrel and suddenly you have massive capital investment that loses money when you operate it

Ebeneezer -- Under the inorganic theory, oil comes from the same place that iron does. If we look at the solar system, we notice that organic compounds and hydrocarbons are downright common. Carbonaceous asteroids, the methane atmospheres of Neptune and Uranus, the methane ice of Pluto and its relatives, the composition of Titan's seas . . . they're everywhere. It seems likely that Earth, while consolidating out of the nebula that formed the solar system, would have accumulated a decent fraction. While hydrocarbons that reached the atmosphere this close to the Sun would be broken down by sunlight over mere millions of years (out of the billions the Earth has been around), the hydrocarbons trapped underground would remain, available to those who found and drilled them. In some cases the hydrocarbons would have lost hydrogen to heat, and manifest as coal; in others, they would take forms much like petroleum; methane would be associated with both types of deposit.