Good news on oil – by Terence Corcoran (Financial Post – January 26, 2016)

As the price of oil wavers around US$30 a barrel, it’s worth contemplating the long-term history of the price of the world’s greatest source of energy — and the real economic benefits that flow from oil prices that are in line with that history.

Financial markets appear more than ready to ignore the fact that today’s oil price is in line with long-term price performance and that oil’s occasional bursts through US$100 look more like erratic deviations. The question is not why oil has fallen so precipitously to US$30, but why it ever rose to more than US$100 in the first place.

In mid-2008, the price of oil hit a record US$147 a barrel. A Wikipedia entry lists a variety of contemporary explanations for the price record, none of which stand up to scrutiny. Among the alleged reasons for oil’s explosive rise in 2008 were the arrival of peak oil, aggressive market speculation by greedy Wall Street investors, and a predicted surge in demand.

The upward move in prices actually began in 2003 and continued for five years before hitting US$147.12 on July 11, 2008.

What really happened? James Bullard, head of the St. Louis Federal Reserve Bank, said last month that “a key event, as yet unidentified in the academic literature,” occurred in 2003 that led to the near tripling of the average price of oil within five years. The price plunged briefly later in 2008, but then rebounded to the US$100-plus levels that persisted through to 2014.

For the rest of this column, click here:

Comments are closed.