The Oil Cycle
By Arnold Kling
In Catherine Rampell’s list of sectors that had the greatest sales growth last year, I was struck by how many of them are energy-related. Assuming that farming was driven by ethanol, the top four sectors were essentially oil plays. Oil prices were high for much of last year, and my guess is that at today’s price the oil sector may not look so strong.
But will today’s prices persist? One month ago, Dave Cohen wrote,
Today’s NYMEX WTI oil price, about $45/barrel, is dangerously, outrageously low. Crude oil is not some “inconsequential penny stock” as Clive Maund pointed out, but that’s how it’s been priced (321Energy, November 19, 2008). I am going to talk about how oil prices get set in a futile attempt to understand what future prices might look like. I find little reason for optimism regarding the market’s ability to provide a coherent oil price signal reflecting future scarcity of this precious non-renewable resource.
Read the whole thing (pointer from James Hamilton. Yesterday, I actually went so far as to speculate in oil by purchasing shares in an exchange-traded fund linked to the price of WTI.
We’ll see what happens in a few years. If oil prices stay low because the world’s economy shrinks, then oil will be a bad investment. If oil prices stay low because alternative energy suddenly becomes cheaper, my guess is that the rest of the economy will be strong enough to make up for my losing a bet on oil.