Irrational Exuberance

My modest attempts to understand energy economics have left me unprepared for today’s hundred-dollar-a-barrel milestone. With the U.S. economy teetering on the brink of recession, future demand is expected to be low, which the smarty-pants economists tell me should mean lower oil prices. Yet…

Thankfully for my ego, the folks at the Daily Diary of the American Dream are similarly puzzled:

The U.S. economy is slowing, and so is China’s. The growth in gasoline consumption is ebbing, particularly in the U.S., as three years of steadily increasing pump prices bite. The International Energy Agency has cut its forecast for 2008 oil-demand growth by nearly half a percentage point. U.S. supplies of crude oil and gasoline are rising.

So today, for the first time ever, oil closed above $100 a barrel. To be precise: $100.01.

What gives?


  1. Somewhere in passing I saw that the jump today was the result of an upcoming OPEC meeting where they are expected to cut production.

  2. Oil prices, especially as measured in US dollars, have some similarity to global temperatures, i.e., both have very strong long-term trends, modified by short-term random noise. often runs fine tutorials on the general topic of extracting signal from noisy data series.

    long-term up, Greenhouse physics, ice-albedo feedback, etc.
    short-term jiggles from El Nino/la Nina, other oceanic oscillations, ~11-year sunspot cycles, aerosols, etc.

    Oil prices:
    long-term up, Peak Oil,
    increasing demand from Asia/China, internal subsidized uses in Saudi Arabia, Iran, etc
    + (for $US) inflation caused, among things, by importing a lot of oil.

    short-term jiggles: seasons, weather, local economies, disruptions in oil-exporting countries, fear of disruptions, hedge funds.

  3. Well, Bush has made it clear the the oil companies have another 11 months free and clear. After that, it seems inevitable that an excess profits tax will go in quickly. I would say such a tax is unlikely to be retroactive. Draw your own conclusions.

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