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.