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KJZZ Cafe: All About Oil
By
Steve Baxter
Story Created:
Oct 22, 2008
Story Updated:
Oct 22, 2008
Oil hit a low last Thursday of 69-85 per barrel... the lowest price in 14 months.
Now it's back up to 74-25.
According to an article in New York Times Magazine, that bounce back up is a good thing.
The article says that oil falling below 70 dollars a barrel would be bad news... not good news.
Here's their reasoning.
Oil History
- The price of oil was about 4 bucks a barrel in the early 70s.
- Then came the Middle East Oil Embargo beginning in 1973.
The scarcity of oil sent the price up 10 times... to about 40 dollars.
- We saw a surge of smaller, more fuel-efficient Japanese cars.
Detroit moved away from land yachts and muscle cars toward smaller compacts.
- In 1979, the Iranian hostage crisis jacked the price of oil up again.
- Once that was solved in early '81, the oil market slumped, and the price dropped to about 12 dollars a barrel.
The price eventually reaches equilibrium with the marginal rate... the rate it takes to replace one unit.
If someone charges more, a competitor can undercut the price... which keeps the price low.
After the dot-com stock bubble burst in 2000, investors thought they found a new, safer place to invest... in oil commodities.
That's when we began to see the price creep up.
And it's been instructive for the market to find the top end.
At about 50 dollars a barrel, people began driving less.
By 120 a barrel, they parked their S-U-Vs en masse.
Countries that subsidize prices -- like China, India, and Indonesia -- quit the subsidies in May, and their consumption dropped fast.
That left a glut of oil on the market... and the price accordingly fell.
The New York Times author believes that cheaper oil could lull us into a sense that there's no urgency to solve the problem.
Just like the 1980s before, it could thwart the retooling of Detroit... research on alternative fuels... and exploitation of shale and offshore reserves.
Then one day, when the market tightens up again, we'll go through the whole crazy process again.
The article says we found the top end of the market... about 150 dollars a barrel.
They recommend keeping the bottom artificially high -- say about 70 dollars a barrel, through taxes if necessary -- to maintain sufficient motivation to solve our oil dependence.
