For 31 years oil prices were pretty stable. Where are they headed now?
From 1982 to 2003 oil prices remained largely within a narrow band between $20 and $30 / barrel. Then prices spiked, advancing five-fold between 2003 and 2008. This is roughly similar to the two supply-shocks experienced in the ‘70s. In the early ‘70s prices quadrupled from $3 to $12. Then, after the recession weakened them to $8, quadrupled again to $32 during the Iranian crisis.
Is it different this time? Prices rose from 2004 to 2008 because of a surge in demand, not a reduction in supply. Conventional wisdom says that this is less problematic than a supply shock; the increase in demand leads to higher production. But consumers saw the same effects on their wallets. Higher prices from increased demand in Guanzhou look the same as those resulting from conflict in Bengazi or a pipeline problem in Kazakhstan.
The response in 2008 was typical: reduced driving in the short-run, and changes in capital purchases in the long run. Hybrids, ultra-efficient diesels, and all-electric cars have become trendy. More significantly, overall consumer purchases, especially those of automobiles, dropped significantly. When the financial markets imploded in September and the resulting credit squeeze led to a global recession, demand collapsed and prices fell back to around $70 / barrel.
Where are they going now? After stabilizing at close to the cost of production, they’ve recently gone up some 30%. But 30% is not 3 times. Our economy is has more flexibility than it did just three years ago. As in the ‘80s, higher prices will be highly volatile both up and down.
Douglas R. Tengdin, CFA
Chief Investment Officer
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