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Oil Price Cycles Up, Then Down
Posted By Barry Ritholtz On October 2, 2006 @ 10:05 am In Commodities,Energy,Weblogs | Comments Disabled
I’ve been having an interesting email discussion with Matt Trivisonno  about some energy issues. What started it was our prior discussion on Why is Oil Dropping (and what might its impact be) ?
Matt is more bullish than I (to say the least). I found his 20 points as to how and why Oil prices have been all over the place interesting; consider it a bit of counterprogramming.
Here’s Matt’s 20 point chrononlogy:
1) Oil is cheap in 2002, there is no investment, oil infrastructure decays
2) Everybody "knows" oil is an inherently cheap commodity
3) Oil producers fail to forecast robust global growth and oil demand
4) Prices rise as market signals its needs to producers
5) Oil execs still reluctant after being burned in the last bust
6) Prices rise more as global growth continues
7) Oil companies begin to invest, but increasing supply takes years
8) Oil prices rise some more
9) Oil companies are now scrambling to meet demand
10) SUVs still selling as drivers expect gasoline prices to fall after
11) Speculation picks up
12) The new boom induces oil-investing mania
13) Everybody "knows" that oil always goes up
14) Capitalism works after all, and supply finally meets demand in 2006
15) But the speculation-turbo-charged price of oil induces a demand shift
16) Drivers capitulate and switch from Detroit SUVs to Toyotas
17) The demise of the Hummer H1 in June marks the top of oil prices
18) The huge oil inventory built up by speculators cascades onto the market
19) Prices plunge as the economy signals "that’s enough" to producers
20) Lower energy costs feed back into continued global growth
I have 4 primary difference with Matt:
a) Notably missing is the impact of the Fed cutting
rates to half century lows, and how that impacts any dollar denominated
commodity (oil, gold, real estate, etc). I believe that was quite a significant event;
b) What? No terror premium?
c) The switching process from SUVs to more fuel efficient vehicles takes much longer, as drivers are stuck in leases, ownership, etc.
d) Oil only goes up? I thought it was Real Estate that only went up!
Anyway, its a thought provoking scenario regardless . . .
Will OPEC Collapse in 2006 Like it Did in 1986? 
Techsono, September 30, 2006
Demise of the Hummer 
Minayanvcille, Aug 09, 2006 12:52 pm
Pain From ’80s Factors Into Oil Now 
James J. Cramer
RealMoney.com, 3/17/2005 11:21 AM EST
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2006/10/oil-price-cycles-up-then-down/
URLs in this post:
 Matt Trivisonno: http://www.techsono.com/invest/opec.html
 Why is Oil Dropping (and what might its impact be): http://bigpicture.typepad.com/comments/2006/09/why_is_oil_drop.html
 Demise of the Hummer: http://www.minyanville.com/articles/index.php?a=10953
 Pain From ’80s Factors Into Oil Now: http://www.thestreet.com/p/_rms/rmoney/jamesjcramer/10213714.html
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