People Somewhat Optimistic About The Possibility of $100 Oil

The last time the price of crude oil closed below $100 a barrel was back on March 3, 2008. As of this past Friday – four months since the final sub-$100 close – the price of crude oil closed at a record high of $145.29 per barrel.

Increasing global demand and stagnating (at best) supplies coupled with a weak dollar have been the major contributing factors to oil’s astronomical climb over the last several years. And to make matters worse, in both the short term and long term, it doesn’t appear as if things will get significantly better for either supply and demand or the dollar. This has led many prognosticators to warn the biggest price shocks may be yet to come.

Despite all of the gloom and doom regarding oil and gasoline prices, there are still plenty of people out there who believe oil prices will soon pop and within the next 12 months, we will see prices drop back to the $60 to $80 range.

So, to get a gauge of where Daily Fuel Economy Tip readers fall in this spectrum, I recently had a poll up on the site which very simply asked: “Do you believe oil will ever drop below $100 per barrel again?” Here’s how responses came back:

  • 41% believe oil will fall below $100 again
  • 59% believe oil will never fall below $100 again

While these numbers are clearly in favor of those who believe sub-$100 oil is a thing of the past, I found it kind of staggering that over 40% of respondents think $100 oil will have at least one last hurrah.

(Full disclosure – I don’t think oil will ever close below $120 again, let alone $100.)

For me, the most convincing argument for oil pricing holding at current levels and/or climbing even higher centers around the two most recent asset bubbles – the tech stock bubble of the late 1990s/early 2000s and the currently unwinding housing bubble. Let me try to explain:

In both the tech and housing bubbles, asset prices obviously ended up much higher than the asset’s underlying value. Whether it was the thought of future earnings, or a product of creative financing/overpriced appraisals, the prices for both tech stocks and homes became completely out of whack with historical levels. At some point, things were bound to correct.

Now, there are plenty of people who are arguing the same thing about oil prices – there hasn’t been a dramatic shift in supply/demand and the falling value of the dollar has artificially propped up. While this may be true, there’s another, much more significant factor that needs to be taken into account:

OIL IS A FINITE SUBSTANCE. WE CAN’T CREATE ANY MORE AND EVERY DROP WE USE REDUCES THE AMOUNT WE HAVE LEFT.

The reason stated above is what I believe has caused the dramatic spike in oil prices. We’ve simply come to realize that we are quickly closing upon peak oil and there is a premium to be paid for that. This problem is never going to go away and will only get worse the further along we move into the future.

This is why I’m on the side of the 59% of readers who believe the days of sub-$100 oil are gone forever.

Comments

  1. While I agreed with your assessment of the likelihood of sub-$100/barrel oil, there is a flaw in one of your analogies. You describe a parallel between a perceived “oil bubble” and the so-called real estate/housing bubble in the opinions of those who believe that oil prices will fall similarly to housing prices. You then point out that oil is a finite resource and, once used up, it is gone forever.

    The same is true of real estate; as Will Rogers famously said, “they ain’t making any more of it.” Admittedly, real estate can be used indefinitely rather than used up, but only if population doesn’t increase. That has only happened during massive catastrophic dieoffs (think black plague). Of course, such a massive catastrophic dieoff is precisely what the so-called “peak oil gloomers” predict.

  2. Eh, yes and no. If you’re talking strictly about land, yes, you are correct in that it is a finite resource. However, the recent real estate bubble was centered around residential and commercial building, both of which are infinite resources (theoretically).

  3. Well, not really. Only if you consider that you can knock it down and rebuild, but that doesn’t create more real estate. In a world with increasing population, dividing habitable land area by population gives, for example, ft^2/person. This gets smaller as the denominator rises. Ft^2 is fixed, unless you contemplate increasing the radius of the earth by building upward.

    All that said, I don’t disagree with your fundamental hypothesis.

  4. Gaius Obvious says:

    “I found it kind of staggering that over 40% of respondents think $100 oil will have at least one last hurrah. (Full disclosure – I don’t think oil will ever close below $120 again, let alone $100.)”

    Well, today (21 October 2008) crude oil closed at $66 a barrel.
    I think you need to reassess your opinion of the wisdom of the crowd and the reasons you didn’t see the oil price bubble which was obviously based more on speculation than on demand because demand hasn’t dropped more than 50% yet the price has.

  5. I can’t believe how plain stupid this column was. Oil is sitting at the $40 per barrel level as I type this, not 6 months after this column was written.

    Take an econ class you fool. Rush Limbaugh was predicting $90 oil by January back when oil hit $145. Looks like he estimated conservatively.

  6. peggy whitt says:

    Yesterday gas was $1.559 today its up to $1.659
    What happened oil was $40.00 a barrel this morning .

  7. Peggy, the price of oil and the price of gasoline don’t move in unison.

  8. Good call, Nostradamus. LOL.

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