Sunday, May 11, 2008

Price of oil

Posted by Tim Bousquet on Sun, May 11, 2008 at 6:59 AM

Weekend trading price: $125.96/barrel

City budget assumptions: $100/barrel

My prediction: soon after the October election, the newly sitting city council will have to deal with a fiscal crisis at city hall, due to skyrocketing fuel costs.

It's always dicey to make predictions, and I don't know what kind of modelling city bureaucrats used to make their forecasts, but I just can't see the $100 figure returning. What's happening now is that all that speculative investment money that had been tied up in American real estate is being dumped into commodities-- food and oil futures. It's this secondary futures market, and not classic consumer supply and demand, that is driving the price of oil.

All speculative bubbles eventually burst, but it takes a while-- the real estate boom lasted about ten years, and the tech boom before that about six. There are, however, complications with oil. Effectively, we've reached "peak oil"-- supply might be going up a tad, here and there, but demand is increasing faster--- and it's hard to see how a drop in consumer demand will burst the bubble; while people can do without the internet or even owning their own house, the modern economy can't function without oil, at least until we build alternatives.

So, no 100 buck oil.