Oil Rises, Oil Falls
The History of Oil Meets the Perfect Energy Trifecta
Jim Puplava, Financial Sense
... We began 2008 with oil prices close to $100 a barrel. Oil prices rose rapidly during the first half of last year eventually setting a record high at $147 a barrel during the first week of July, a price very few thought was possible. In a single year the price of energy rose nearly 50%, than collapsed by 74% during the final quarter of the year. From reaching a low of $10 a barrel in 1998 until the apex in July of 2008, oil prices rose nearly fifteen-fold in only 10 years. From a record low to a record high, oil's price advance continued to confound the experts throughout its historic price run. A litany of excuses and scapegoats were given to explain its meteoric ascent. They ranged from the second Gulf War, to terrorist attacks, to weather, to the falling value of the dollar, to everyone's favorite—"speculators." The most common explanation given for oil's thespian rise was that it was due to speculators entering the market and driving the price up. Six months later, this still seems to be the common perception held by today's mainstream media from CBS's 60 Minutes to FoxNews' The O'Reilly Factor.
However, it is clear from reviewing a chart of oil prices over the last decade (above) that something else was occurring beneath the surface. The real price driver was largely due to fundamental supply and demand factors. The demand for oil was growing faster than the supply. What was driving demand was that the world economy expanded at its fastest pace in decades, led by explosive growth in emerging market countries. From 2004 to 2007 world economies grew by close to 5% per year with a concomitant growth in oil consumption of 3.9% per year (Interagency Task Force on Commodity Markets, "Interim Report on Crude Oil," July 2008, p 3).
(28 January 2009)
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