How high can it go? That’s the billion dollar question.
Oil ministers from around the world are meeting in Madrid. There is no shortage of supply. And the demand destruction in developed economies is significant.
Car-makers around the world are shuttering pickup truck plants. The fuel savings that result when you move from 12 miles per gallon to 25 miles per gallon are three times as much as the savings that come from moving from 30 to 50 mpg. The technology is there to cut fuel demand by half. And people are driving less, too.
Speculation may be driving prices higher. But if prices are too high, demand will go down while supply soars. Since long-term effects differ from short-term effects, rising prices almost insure such an overshoot.
It happened in the ‘80s. The run-up in 1980 was followed by a crash in ’84. Everyone remembers $34 oil at the peak; nobody recalls $8 oil at the trough. I can’t tell you when the crash will come this time, but eventually it will come.
Douglas R. Tengdin, CFA
Chief Investment Officer
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