What Goes Down, Must Come Up

Depends on what real estate does. In the past, whenever deflation has threatened, the Fed has blinked.

So, peak oil price eh. You do you recall saying that at $60, $75, $90...

Never mind. You probably didn't mean it.

I certainly hope that the dollar is at the bottom, I don't wanttohave to keep sending dollars back to pay my mortgage shortfall in London.

You probably didn't mean it.

Of course I meant it. I still mean it. Apparently, you forget that whenever I said that, I always caveated it with "inflation adjusted." Or perhaps you didn't understand what I meant.

Obviously, if there is a huge drop in the dollar relative to other currencies, and the price is denominated in dollars, there is going to be a huge increase in the oil price. That doesn't mean that it went up in nominal terms. Even with the low dollar, there are huge new sources coming on line that are profitable at forty dollars or less a barrel. This price is simply unsustainable.

This price is simply unsustainable.

Oil scheduled for delivery in December 2015 traded yesterday at $108.07. So it may be true that you "mean it", but there are a lot of investors who mean their predictions a lot more than you mean yours, in the sense that they put money on them.

What these investors would tell you is that yes, there are some "huge" new sources, but they're not all that huge compared to current consumption. Moreover existing sources are declining, and demand is growing at a rapid clip.

Actually, the whole philosophy that "what goes down, must come up," or otherwise that we can expect prices to swing back from climbs or falls, is sucker's wisdom on Wall Street. Unless the market is fundamentally broken, prices are good predictors of their future values.

Adjusted for any reasonably expected amount of inflation, $108 in 2015 is well below current prices.

Of course I meant it. I still mean it. Apparently, you forget that whenever I said that, I always caveated it with "inflation adjusted."

Even included inflation adjustment you've been talking nonsense about this since prices started hiking in 2003. Oil each year since 2004 has (does a quite Excel guesswork) has risen at 45%ish per year. That's more than 10 times the rate of inflation in the RPI over that period.

Inflation adjusted at 2.5% (which is a tad optimistic currently) then it looks pretty good, but consider that starting from the price even a year ago and adjusting for inflation through to 2015, the price you get is something like $93 a barrel.

Essentially, however you cut the numbers, your analysis on this has, like with many subjects been utterly rubbish.

Sure there are huge new sources out there but the timescales for adopting these are significant, as they are for any large process capital engineering project and some, like the South Atlantic reserves, require a lot of plant to be built, tested and deployed.

I think we'll see higher prices - between the political problems in places like Nigeria, general problems in supply in the Mid-East and good old fashioned speculation, this is looking nasty.

Of course, what I haven't included in the "simple" inflation numbers is the decline in the value of the US dollar... of course, I better do that before rand jumps in and mentions it without looking at the actual numbers. The dollar has slipped about 30% over the same period against the Euro and other currencies. Which doesn't account for the gains in oil either.

So factoring that in from the starting point of 2004 and allowing for the dollar decline against other currencies and average inflation rates I make the adjusted rate for Oil to be around $45 a barrel - not quite a third of where we are actually, but close.

Of course, if the oil market likes the profits and decides to start moving oil prices in other currencies... well... still doesn't look good.

Adjusted for any reasonably expected amount of inflation, $108 in 2015 is well below current prices.

$108 today would be worth $89 seven years ago according to the inflation calculator. You were already saying that oil would fall when it was at $70, or lower.

What is really going on is that oil has been suffering from devastating long-term volatility. The price by 2015 could plausibly skyrocket to $200, or fall to $40. Humanity has a lot of trouble planning properly for the far future.

$108 today would be worth $89 seven years ago according to the inflation calculator. You were already saying that oil would fall when it was at $70, or lower.

Nice dodge. I repeat, the current price is not sustainable.

What is really going on is that oil has been suffering from devastating long-term volatility. The price by 2015 could plausibly skyrocket to $200, or fall to $40. Humanity has a lot of trouble planning properly for the far future.

Given technology trends, I think that $40 is a lot more likely than $200 (though both are unlikely). Do you want to make the Simon bet?

I think we'll see higher prices

You shouldn't fall into the same trap as Rand. What do you know that the market doesn't know? We could see higher or much higher prices because life has been unpredictable. But then again we could see lower prices. Investors have already factored in all future expectations to the best of their knowledge.

Do you want to make the Simon bet?

I have no interest in making any oil bet that the market isn't already making. The path to wisdom is to accept other people's expertise before conjuring your own explanations.

But I will say this: If the market expects the price of oil to hold steady in the face of inflation, it could be expecting conservation as much as any new bonanza sources, conventional or unconventional. Conservation is what the environmentalists have asked for all along. Certainly at today's prices, the US is wasting expensive oil hand over fist. We didn't plan well for this contingency. Maybe by 2015 we'll downsize some of those trucks and SUVs, and shorten some of those marathon commuting routes, to bring down the price of oil some.

Certainly at today's prices, the US is wasting expensive oil hand over fist. We didn't plan well for this contingency. Maybe by 2015 we'll downsize some of those trucks and SUVs, and shorten some of those marathon commuting routes, to bring down the price of oil some.

Yes, that is one of many factors that will keep oil prices down. But only one.

It's nutty to think that oil prices will go to $200/barrel, ever, in nominal terms. At least for any sustained period of time (obviously, there could be occasional spikes in that realm, particularly in futures markets). Or even to think that current prices are sustainable. But then, I have some nutty commenters.

Yes, that is one of many factors that will keep oil prices down.

Actually, less demand is one of exactly two factors that could keep oil prices down. The other one is more supply.

It's nutty to think that oil prices will go to $200/barrel, ever, in nominal terms.

I didn't say they will, I said that they could. Which you seemed to acknowledge, since you said that they could "spike" to that value. But you're being pretty vague about what exactly constitutes a spike or sustainment.

Anyway it's a big mistake to suppose that skyrocketing prices are just a bad dream that will end soon, if in fact the market is betting on serious energy conservation to keep them from going even higher.

It's nutty to think that oil prices will go to $200/barrel, ever, in nominal terms. At least for any sustained period of time (obviously, there could be occasional spikes in that realm, particularly in futures markets). Or even to think that current prices are sustainable. But then, I have some nutty commenters.

Well, you're nutty so we balance ourselves out.

You were pretty certain we'd peaked back at $48/$65/$78 etc... so your ability to comment now is pretty meaningless.

What do you know that the market doesn't know?

Me? Oh, absolutely nothing... Although, to be fair probably more than Rand because he's obviously pretty good at self delusion.

I suspect that we've got these prices for a fair while now. New supplies will take 3-4 years to start to come on stream because of the profit taking nature of the oil companies. Serious offset alternatives like wider Nuclear power take longer. Iraq just isn't really improving, despite Rand's imagination.

So we're stuck in 5-10 years of huge volitity with equity markets looking a mess you'll see commodities, especially volatile ones like Oil looking real good as a place to stash cash.

especially volatile ones like Oil looking real good as a place to stash cash.

Except that volatile securities are actually a bad place to stash cash. Volatility is the opposite of what you want when you invest.

Not to mention that the lion's share of oil securities mature in less than one year. And once you do own the physical oil, it costs money to maintain it. So oil makes no sense as an investment unless you either need the oil, or need to sell it, or you are a gambler. You could, however, invest in oil companies rather than the oil itself. Although again, targeted investing is not a good idea unless you are smarter than the market.

Jim, he's talking about volatile commodities not securities. But I agree, oil is definitely a bad place to store anything. Volatility isn't necessarily bad for a security. If you're patient, it means you can get better buy and sell prices. And you can always sell covered calls and puts (in related publically traded stocks) in order to compensate for a lot of volatility.

Well I just transposed the terms "equities" and "securities". Securities and commodities are the two types of equities. (Not sure if it is the only two types or merely the two main types.)

Anyway to get back to the main point. The title of this post is "What goes down, must come up". In reference to the exchange value of equities or anything else, the entire principle is nonsense.

And yet the U.S. is sitting at 45th in the World when it comes to highest oil prices. Things could be worse.

>And yet the U.S. is sitting at 45th in the World when it comes to highest oil prices. Things could be worse.

No, Josh, oil is an international commodity and the US pays exactly the same exorbitant oil prices as the rest of the world. What you read or heard is that the US has the 45th cheapest gas prices. That is true, and it has a lot to do with why we waste so much gas. Gas taxes in the United States are very low. They do not come close to covering the public costs of the road transportation system, much less military expenses in the Middle East. So road transportation in the US is, in effect, heavily subsidized.

By contrast Western Europe is used to expensive gasoline. Yes, gas is even more expensive there, but they are used to that and they use less gas. Their gas taxes serve a purpose. We are the ones left in a short position on oil.

Gas prices in Europe have not kept pace w/ the outrageous price rises that have occurred here in the states. If that were true then Europeans would be paying in excess of $15 dollars a gallon...and they're not.

Gas prices in Europe have not kept pace w/ the outrageous price rises that have occurred here in the states. If that were true then Europeans would be paying in excess of $15 dollars a gallon...and they're not.

They have, but you're looking at the wrong number. Because more than half the cost of the petrol at the pump in a European country is tax, they are significantly more insulated from oil price rises. So even though the price of oil has gone up significantly, the actual price passed onto consumers is significantly lower.

The Economist summed it up nicely that the problem isn't the high price of oil, its that US consumers have been used to slow cost Oil for too long and haven't had to really worry about conservation issues.

I've 2 cars in the US, a 4L and a 3L - I'd never even consider owning anything larger than 2L when I lived in the UK.

It is now September 17th and the Dated Brent Spot price for a barrel of oil is $89.47:

Nymex Crude Future 93.16 2.01 2.21 12:23
Dated Brent Spot 89.47 -.06 -.07 12:53
WTI Cushing Spot 92.94 1.79 1.96 12:15

The conventional wisdom says the components of this drop are a weakening global economy and a stronger (not strong, just stronger than it was) dollar.