Milkshake-drinking at all-time high

Before I talk about Friday’s jump in oil prices, I should probably state that these are my personal opinions and completely unrelated to what I do at work (which doesn’t involve energy markets anyway).
The papers emphasize that this is the “biggest jump ever” for oil, but this seems a bit misleading: “ever” only goes back to 1983 (when oil futures started trading on NYMEX, apparently), which means it doesn’t include the last big oil crisis in the 70’s. It may still be the case that $10.75 is the biggest absolute price increase, but the starting price is also higher than it’s ever been—usually the more relevant measure is fractional, so the real question is whether an 8% jump is record-setting. (It might be but it’s not clear from the articles I read.)
Next we have the question of whether or not there’s a bubble going on and oil is really overvalued at this point. According to the Times,

One view gaining ground is that the commodity market is caught in a speculative bubble akin to the recent housing bubble or the technology bubble of the late 1990s. That theory was raised by politicians in Washington and by OPEC producers, who blame speculators for the staggering oil rally.

I have to say that neither politicians in Washington or OPEC producers seem terribly trustworthy sources if you’re looking for accurate analysis of energy markets. At least part of the rise in prices this year is driven by the fact that supply isn’t increasing to match demand, but you’re not going to hear OPEC talk about this.
If I had to guess I’d say this is not a bubble, and if anything oil is probably still undervalued right now. I can think of a number of factors that plausibly contribute to the price of oil being as high as it is. Some of them are being mentioned in the press: the weak dollar, the concerns over possible war in Iran, the increased demand from Asia. On top of these things I think the long-term trends are going to cause oil prices to rise indefinitely. I’m not stocking canned goods in anticipation of a peak oil apocalypse, but the fact remains that oil is a limited resource and eventually the supply will start to decrease. We’re already seeing the growth of oil supply flatten out at the same time as demand from developing countries is ramping up rapidly, so it’s no surprise that prices would rise. (Had I the funds a few years ago I would have bet on this.)
Meanwhile, high gas prices in America will hopefully have good side effects, leading to energy conservation and spurring investment in alternative energy. Unfortunately, it’ll also bring economic hardship for a lot of people and push the economy further into recession, so I can’t really applaud it. However, I can at least be happy that I picked a good time to sell my car.

4 thoughts on “Milkshake-drinking at all-time high

  1. JSpur

    The per capita income deflated cost of oil in 1980 was $160/barrel in today’s dollars, according to a study done by Lionstone’s economists, so we’re still below that level. I was a lawyer to the oil patch in those days and I can’t get past the memories of how it went from that level to about 20% of that in four years’ time. I have the sense that right now oil is overbought and will in the next couple of years return to its average since 1974 (again, per capita income deflated) of about $60/bbl. And I picked a good time to trade up to one of the new fuel-efficiency-enhanced Mini Coopers.

  2. Mason

    AG, you also picked a good city in which not to have a car. :) For that matter, so did I.
    For some reason, I’m missing the milkshake reference with respect to the actual blog entry, though I suspect I am not supposed to be missing it.

  3. Josh

    A very well titled blog-entry.
    Back in Berkeley I remember I said something about the bubble bursting, which I imagine was a misnomer as I’m not too good at the economical jargon. My guess in the realm of the current trends is that the speedy increase in prices in the past few years is a bubble, because I visually relate a bubble to something that rises quickly due to any number of causes. In this case: demand, the topping off of oil in big production countries like Siberia, and simply America’s having it for so good for so long.
    My misnomer is in the “bursting”, as I don’t think it will burst so much as level off, and it will take a while for it to find its equilibrium point. We’re catching up to a whole bunch of countries that have it a lot harder than us, and when you live in my town where every night you see at least three stretched Hummer limos, you realize maybe we should be having it a lot harder. The sad thing is that won’t affect the insanely wealthy that can afford that sort of waste, just the people on the bottom will suffer for it.
    Anyway, I think there may be a bit of a backlash to the severe price rising, since a lot of people seem to think we’re entering into Mad Max territory. Prices may drop back down but will in the end steadily increase as time goes on. We’re just running out with an ever-weakening dollar.
    I hope alternative energy resources are explored, because I don’t think we’re doing enough. Hybrids aren’t where they should be yet, and the battery electricity doesn’t come from magic in the environmental footprint map of the world. I’m looking forward to seeing what the hydrogen cars, and those cars in India that run on compressed air, will do when they hit America. Because air and hydrogen are limitless resources, right? Right?
    *sigh*
    P.S. Also, here’s a link to a “news story” from Florida about a Jesus freak who claims to have replaced his fuel injection system with a mason jar of water and now gets 100 miles to the OUNCE. I find this interesting because an actual news station took the time to report this as if this was a possible story. And if you see the video, it looks like the reporters actually believe this happened. If I could imbed a facepalm picture now, I would.

  4. shellock

    That florida new clip is truely painful to watch.
    I am glad i swaped in my old car for a prius last year I did not know at the time how good a choise that was.

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