Business Insight Zone

I’m not a gambling man, but if I were, I’d take the “under” if the line were set anytime after November 12. As I write this, NYMEX crude futures are trading at $97.42 per barrel. More details from the Guardian:

Frenzy in the markets as oil heads for $100 a barrel

The price of oil set yet another record yesterday as low stocks of fuel and further falls in the dollar spurred a frenzied round in the buying of crude.

US light crude futures rose by more than $3 a barrel to break through $97 a barrel to a peak of $97.07, nearly a dollar above the previous high last week. London Brent rose $3 a barrel to a record $93.49. Oil prices have risen by nearly 40% since trading at $70 a barrel as recently as August. “We seem to be seeing a tug of war between people taking profits and those coming in to buy into dips, and they are effectively saying we can go past $100,” said Mike Wittner, oil analyst at Société Générale.

More reasons this is happening:

• A seriously weak dollar.
• The subprime mess driving investors into commodities — not just crude oil but also gold, which has been hitting record highs, too.

Should we worry? James Hamilton of Econbrowser is wary, but ultimately gives a qualified “No.”

Well then, would $100 a barrel worry you?

. . . Consumers cannot continue to ignore oil price increases for much longer.

But even if we return to those historical expenditure shares, an oil price increase need not have the same potential to produce a recession as it may have had in the 1970s.

. . . In my opinion, the key question as to whether an oil price increase would push the economy into a recession remains the context of the price change. The oil price increases over the last few months were not associated with any actual disruption in petroleum supplies, and do not have the same potential to change consumer sentiment and spending patterns as dramatically as occurred in many of the earlier historical oil shocks. For this reason, even if oil does go above $100, my biggest concern remains the housing sector and financial problems.

But if the tanks start rolling or missiles start flying in the Middle East, my worry factor is going to soar along with the price of oil.

Seems like a sensible view to me, except that I would put more nuance into the comment about “any actual disruption in petroleum supplies.” There have been serious, if transient, worries about oil flows out of Nigeria (ongoing civil strife) and Mexico (storm season affecting the giant fields in the Gulf of Mexico). Setting aside the possibility that we’re hitting some form of geologically-driven peak in oil production, there are many, many volatile situations in today’s petroleum geopolitics, ranging from Iran to Nigeria to Venezuela to . . . well, it’s a pretty long list. Given sustained sky-high demand for oil and gas, any escalations in these situations, much less combinations of them, could send oil prices well into the triple digits in a heartbeat.

Category: Energy