Thursday, November 8, 2007

Why $100 Oil Can't Float

"The price [of oil] is too high to be sustainable. There are 10 solid reasons why: 1, Supply above ground is abundant. ... 2. Supply below ground is abundant. ... 3. Production is set to increase. ... 4. The cost of production is much less than $100 a barrel. ... 5. Iranian exports aren't likely to be cut. ... 6. High prices are pulling back demand. ... 7. High prices are forcing goverments to cut subsidies. ... 8. Energy from oil is looking expensive compared with energy from gas. ... 9. The weak dollar is a poor excuse for high oil prices. ... 10. Speculation is artificially boosting prices", WSJ, 8 November.

My responses: 1. So? 2. So? 3. So? 4. Irrelevant. What does "cost" mean? I remember in 1973, the sainted Milton Friedman blew this one during the first oil shock. He thought per barrel lifting costs were relevant. He later realized that the marginal barrel of oil is the next barrel we find. Besides, price drives cost, not vice versa. 5. So? 6. So? 7. This is important as China and other countries reduce subsidies, this will shift the demand curve. 8. So gas will increase. 9. What does this mean? 10. What does artificial mean? We are not impressed.

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