Remember oil prices? They were supposed to strangle the economy. Well, it didn’t work out that way.
Six months ago the “peak oil” crowd were all agog with predictions of economic Armageddon based on oil prices. Since oil was headed for $200 or $300 per barrel, they said, we all had either better start learning Arabic or strap solar panels to our hybrid cars. But a funny thing happened on the way to the panic. The market didn’t go along.
Now market mavens are predicting $30 and even $20 oil. Environmentalists who decried the additional drilling that $100 oil engendered are now calling for subsidies when $50 oil threatens their green projects.
The problems with oil price forecasting is that it assumes that reserves are known with precision, that the levels are fixed, and that demand can be projected with accuracy over a long period. Clearly, these assumptions are flawed.
We saw price overshoot and correction in the `70s and `80s when OPEC emerged. My bet is that with the emergence of China and India as consumers, we’ll see it again. It’s not different this time.
Douglas R. Tengdin, CFA
Chief Investment Officer
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