Wednesday, 6 January 2016

Well done everybody who guessed the oil price would be $40/barrel in December 2015.

The price of a barrel of crude oil had fallen from well over $100 in June 2014 to £70 at the start of December 2014, so I ran a Fun Online Poll in December 2014 with results as follows:

How low will the price of a barrel of oil fall over the next year?

$70 - 16%
$60 - 31%
$50 - 23%
$40 - 22%
$30 - 4%
$20 - 4%

So well done the 22% of people who went for $40, which is what it was last month!

As it happens, I voted $40, I explained why when I started the poll when price was still $70. Let's not get too technical about the different benchmark prices for different types of oil.

This was of course luck as much as anything - I would have been equally unsurprised if the price were now $140 again. It just strikes me that the inflation-adjusted price of oil hovered around $20 (in 2010 prices) for ninety years (1880 - 1970), which is presumably the average bare minimum extraction cost, and that it is reasonable to expect the price to fall back that low every so often. Everything above that is speculation and manipulation. $30 is probably the averaged out actual extraction costs nowadays, so $40 seemed like a reasonably floor to go for.

* If it were $140, the 'experts' would be queuing up to tell us why: tensions in the Middle East; drop off in supply from Libya, Syria and Iraq; the embargo on Iran; Russia-Ukraine pipeline disputes; North Sea oil running out; extraction costs going up.

And they would clearly be wrong, just the same as anybody can explain why the oil price is so low now. It is easy to explain why the oil price will fall back to extraction costs every so often - I just did. But it is impossible to say why it has happened now.


Rich Tee said...

It's interesting that left-wing types often regard the OPEC cartel as an evil and greedy organisation, but by deliberately raising the price of oil they are incentivising people to use less of it, thereby helping to conserve a finite natural resource.

For environmentalists, a low oil price should be a bad thing because it reduces the costs of production, which keeps prices down and therefore encourages consumption of consumer goods, the "throwaway society". Do they actually see it that way? I'm not sure.

Mark Wadsworth said...

RT, good point. I don't really get it either.

Mark Wadsworth said...

RT, it's a bit like when the big supermarkets got fined for rigging the price of cigarettes i.e. pushing them up, allegedly (I doubt they did - they probably just caved in because they could;t be bothered arguing). This is the same government that is pushing up the price of fags tenfold by slapping huge taxes on them - the government should have been applauding this behaviour.

Bayard said...

Mark, it's probably a bit like the Business Rates scenario above - "stop robbing him because I want to rob him".