It’s been a while since I paid over $3.00/gallon for gas, but had that pleasure once again very recently, as prices have been creeping slowly ever upward.  As the gas flowed, I thought back to a piece I’d written elsewhere some time ago (April ’06, to be exact) lamenting the fact that those who had gotten it wrong on just about everything else had gotten it wrong on oil, too.  So, as oil holds over $80/barrel and gas inches higher, here’s another look in the time machine at what the Very Serious People were saying almost eight years ago (emphasis mine):

Bruce Bartlett, National Review, March 2003

“…markets clearly expect lower prices. On the eve of hostilities, oil was selling for about $37 per barrel. At this price, Americans would be paying $270 billion per year for oil. But once it became clear that Iraq’s liberation was at hand, the price quickly dropped to about $28 per barrel, cutting our annual oil bill by $70 billion. With full Iraqi production, the price might drop to $20 per barrel or less, giving us the equivalent of an annual tax cut of about $120 billion per year. And this is a tax cut the entire world benefits from.”

Rand Corp analysis, January 2003

“Under a free market, oil prices would probably fall to between $8 and $12 per barrel over the next 10 years — down dramatically from today’s price of about $25 per barrel.  [...]  A major decrease in petroleum prices would boost U.S. and global economic activity. Home heating oil prices would drop by at least a third. Gasoline prices would drop to less than $1 a gallon. As a result, people and business in the United States and throughout the world would spend far less for fuel. From an economic perspective, the United States and many nations around the world would clearly win.”

The Heritage Foundation, March 2003

“An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win–win game: Iraq will emerge with a more viable oil industry, while the world will benefit from a more stable and abundant oil supply.”

The Wall St. Journal (link no longer available):

“Of course, the largest benefit–a more stable Mideast–is huge but unquantifiable. A second plus, lower oil prices, is somewhat more measurable. The premium on 11.5 million barrels imported every day by the U.S. is a transfer from us to producing countries. Postwar, with Iraqi production back in the pipeline and calmer markets, oil prices will fall even further. If they drop to an average in the low $20s, the U.S. economy will get a boost of $55 billion to $60 billion a year.”

There were numerous other forecasts in the $18 – $28/barrel range.  Of course, the Very Serious People continue to hold sway in our national discourse on a host of issues (austerity now now now!).  I’m not sure exactly why, but they do.  It’s important to keep an accurate historical record — a chronology — of who said what, and when.  Not that anyone’s ever called to task, but so the record is clear.

Category: Contrary Indicators, Energy, Markets, Really, really bad calls, War/Defense

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “Oil’s Well That Ends Well?”

  1. Invictus — the war focus was misplaced — they should have been watching the Fed!

  2. Mannwich says:

    But nobody could have predicted [insert favorite calamity here that many "nobodies" predicted]…..

  3. AHodge says:

    How to forecast oil
    1 there will be huge cycles, its mean reverting
    2 the industry will always use ridiculously low price foreast assumptions–assume much higher.

    as to why?
    i the interest of the producers to have huge price swings
    that scares off investment keeps capacity low.
    Assuming a low future price reduces expected invesment returns nd investment
    also keeps capacity low

  4. Don’t forget T. Boone Pickens though, in early 2008, perhaps late 2007 (I’m too lazy to look up) proclaiming that “Oil will never fall below $100 barrel again”.

    The oil story is really just ancillary to the Fed’s money story. More dolllars=higher priced oil. It’s really as simple as that. No, we aren’t on the gold standard anymore. We’re on the de facto oil standard. I expect prices to break $100 again in the next six months, perhaps again reaching its recent highs of about $150/barrel.

    Invictus, I see you’re borrowing some of Krugman’s phrases (Very Serious People; now, now, now). I hope that doesn’t mean you agree with his neo-Keynesian nonsense.

  5. Invictus says:


    I think it was Atrios who coined “Very Serious People,” but I, too, am too lazy right now to look it up. It’s my recollection that Krugman borrowed it from him, though you’re right on the “now, now, now” for sure.

  6. Transor Z says:

    National Review, Rand, Heritage Foundation, WSJ . . . Mother Jones

    “One of these things is not like the others…”

  7. Lesly says:

    Very Serious People had every right to believe an active military force in the ME could trick f— regimes into lucrative oil exploration and exportation deals benefiting the U.S. One country in particular was sure to fellate us for invading them.

    Joke’s on us.

  8. DeDude says:

    “I expect prices to break $100 again in the next six months”

    I guess we shall call you to task for that prediction in 6 months.

    “neo-Keynesian nonsense”

    We can call you to task on that nonsense right away – as China with a stimulus package matching the predicted loss of aggregate demand sailed thorough the crisis without a recession and Germany with a (actual targeted real) stimulus of half their loss of aggregate demand, is already back to normal growth rates.

  9. Jojo says:

    “It’s been a while since I paid over $3.00/gallon for gas”
    Regular was $3.029 at Costco the other day. Premium was $3.249. Costco is normally $0,10-0.20/gal cheaper than retail outlets.

  10. RandyClayton says:

    In a recovering world economy and a falling dollar, I’d be shocked if oil prices did not continue higher. Unless we see a vicious double dip — which I do not think will happen — I expect to pay $4.00 per gallon by next summer.

  11. @DeDude. On my oil price prediction, mark your calendar.

    On Krugman, here’s what he said about the UK’s austerity programs:

    The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

    But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

    Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

    ~and here’s what’s presently happening in the UK:

    LONDON—Britain’s economy grew more briskly than expected during the third quarter, damping fears that the U.K. could tip back into recession and, for now, buttressing the government’s move to attack the country’s huge deficit with public-spending cuts.

    In its preliminary estimate Tuesday, Britain’s Office for National Statistics said gross domestic product rose 0.8% between July and September from the previous quarter. Measured on a seasonally adjusted annual rate, the U.K.’s GDP grew about 3.2% in the third quarter.

  12. beaufou says:

    The good old days of invading Iraq, then Iran and then control the oil flow without worrying about OPEC.
    Sheer stupidity as many said back then but the Emperor had new clothes.
    Oil will go above $100 easy and everybody will start partying like it’s 2008 again.

  13. HarryWanger says:

    Can’t remember the last time I paid under $3 in Seattle.

  14. swag says:

    Yardeni was my favorite ” He predicted that any such war would end by spring, and that a drop in oil prices below $20 a barrel would stimulate the economy, enabling profits to recover in 2003. ”

    Mission Accomplished!

  15. swag says:

    Yardeni was my favorite: ” He predicted that any such war would end by spring, and that a drop in oil prices below $20 a barrel would stimulate the economy, enabling profits to recover in 2003. ”

    Mission accomplished!

  16. Transor Z says:

    Watched “The Spill” last night on Frontline. I’m sure that the higher prices are because of the safety overhaul currently taking place industry-wide.

  17. ashpelham2 says:

    We have probably some of the cheapest gas prices in the United States here in Alabama. Less oppressive tax system, I would imagine. However, the cost to us has been a marginalized public education system and a government that is currently hell-bent on us all going to heaven instead of gambling.

    I digress.

    I see no reason at all, not supply or demand issues, for oil to be as high or as low as it is right now. In fact, I’d argue in favor of it to go higher, so we can get on with the business and innovation of tomorrow, to ween ourselves from oil.

    But what do I know.

  18. inthewoods says:

    @The Curmudgeon: Isn’t the point that the British austerity measures have yet to be enacted, whereas China and Germany’s stimulus programs are already in the past? In other words, you don’t know yet what will happen as a result of the British program.

  19. The Curmudgeon:
    You didn’t read the text, did you? It said preliminary estimate. You do know what that means, right? And as inthewoods said, the austerity hasn’t been enacted yet. It was just proposed.

  20. WFTA says:

    Right wing think tanks find more new ways to say “War is good.”

  21. jyc3 says:


    You say they should have been watching the Fed but the dollar is in the Treasury portfolio. I’d say it’s a pretty good bet that these folks were well acquainted with John Snow and knew the administration would pursue a weak dollar policy. In fact, I’d bet most of them even wanted a weaker dollar. These calls on oil were not based on economics; they were based on their political views. Having said that, both sides of the aisle are guilty of this practice and Invictus’ belief that only Republicans are guilty of viewing economics through a political lens is a reflection of his own internal bias. It’s a hard thing to overcome and we’re all guilty of it to one degree or another. I’ve found it most useful to just acknowledge it and admit that predicting the future behavior of humans is a pretty tricky thing.

    Invictus: Just because these guy’s political views made them wrong in the past doesn’t mean their politics will make them wrong in the future. Some of them are pretty smart people and they may actually get the policy right despite their political views. Their past failures tell you nothing about the accuracy of their future predictions. All it tells us is that they are partisans and I’d say that’s a condition that is fairly common in DC.

  22. willid3 says:

    i suspect the price of oil is easy to explain. their was a 10 fold increase in the amount of money that flowed into the oil market. they ‘invested’ in it because they knew that we hadn’t done much to control the appetite for it. and its a commodity that doesn’t spoil. you can park it on ships for months without it going bad. and you can avoid impacting the domestic oil picture as long as you haven’t started unloading it.

  23. inthewoods says:

    @jyc3: So given that their past predictions were wrong, and there is no way to judge future predictions, why would we follow conventional DC wisdom and regard these people as smart? At what point does being consistently wrong finally demote you to not being part of the smart crowd in CD?

  24. rip says:

    @willid3: Close.

    All the commodities records being set right now are nothing more than rampant speculation bidding things up using free money from the Fed.

    Remember the unavoidable $140 or higher price period? Well bend over again, here it comes. What hurts is they’re doing it with the backing of our gov. And no protests from the Hill to date, eh?

    Gotta love our gov.

  25. postman says:

    Other than futures markets, is there a near-pure play on an increase in the price of crude oil? The instrument USO is a hazard to longs because of the contango in crude futures that induces a declining trend in the USO price independent of crude oil price moves.

  26. basquebob says:

    @ The Curmudgeon

    Are you really claiming that policies that have not gone into effect yet have produced results already and that proves said policy right? If so, that’s delusional.

  27. Mannwich says:

    @Curm: I think you get ahead of yourself on that one. To say that the Brits’ economy is improving due in part (or at all) to (or in spite of) the VERY recent austerity measures is disingenuous, AT BEST. Even you’ve pointed out many times that correlation does not imply causation, and I would venture to guess that this instance is a good example of that.

  28. Ah, Manny: I must point out that I didn’t say anything. I simply quoted a couple of articles I saw today, each of which were rather recent, one by Krugman (who bemoans the Brit’s austerity before it is given a try I might point out) and the other by the WSJ that points out that the Brit’s economic performance numbers seem to have quieted some of the people, like Krugman, that believe any limitation on government spending (in a recession!) to be the essence of evil. I understand that nothing is resolved by these examples. But Krugman doesn’t–he’s condemned the Brits from the start.

    This is my take: Krugmanism, i.e., something that’s sort of half-Keynesian, half-Freidmanish, nor any other type economic program or policy that does not structurally change the foundations of western economic systems is doomed to fail. Why? Because of demographics. Keynesianism worked well as an idea during the heyday of the industrial revolution, when demand didn’t really decline, it was just oversupplied, and the economies of the west had expanding populations that could grow out of it. What we are seeing today in developed economies everywhere is structurally-declining demand due to stagnant and aging populations. Unless that changes, all the economic -ism’s in the world won’t sustainably change things. If populations continue to stagnate and decline, a new type of economics will need inventing, because every last theory in economics assumes that economic systems and populations wish to grow. What if, such as Japan is a prime example, the assumption simply isn’t true?

  29. @Calvin Jones and the 13th Apostle, and all the other Krugman defenders (who knew that so many were so enthralled by Krugman? Of course, he is nobility, of a sort, so maybe that explains it).

    Yeah, I read the text of the two articles I posted. And yeah, I get that it really doesn’t prove anything. But neither did Krugman.

    Someone used Germany and China as two great examples of how fiscal stimulus propels economic growth out of the doldrums. Okay. Then why didn’t it work in Japan? And hasn’t in the last two decades? Anyone? Beuller?

  30. Mannwich says:

    Gotcha, Curm. I don’t necessarily disagree with your take, although what we’ve seen since at least the ’80′s isn’t really true “Keynsianism”. It’s just a distorted version of it whereby politicans found out that politically “deficits didn’t matter” (as Cheney put it), as these kick the can policies were used to keep the goodies flowing to the electorate, while putting off any real pain, and thus have a chance at getting elected/re-elected.

  31. DeDude says:


    I have marked my calendar and we shall see. I think the dollar fall will take a pause as QE2 comes in as a disappointment and the PIIGS problems get back in focus. The recovery will likely not be stronger than expected (US, the Elephant in the room in oil consumption, are heading for a double dip because of no federal $ to offset state cuts) so I don’t see the demand side pushing much up.

    As others pointed out we can revisit and discuss the effect of their austerity program on their unemployment and GDP growth in a year or two. If their GDP growth continues at 3.2% and unemployment is no worse, then you can cry BS on Krugman. But from the experience in CA we would expect that austerity programs are bad for employment and the economy.

  32. Mannwich says:

    @Curm: Not defending Krugman, but perhaps there were/are other factors in play in Japan, namely their decision to continually throw money down the black hole that was/is their banking system, instead of using that money for more productive purposes. I have a theory that their real estate and stock bubbles, and subsequent policy actions by their politicans, caused a major generational confidence problem in the system (and each other), which created a vicious self-reinforcing cycle. Of course, our leaders have done, and continue to do, similar things here with the banks, so we may end up on that path, or worse, but our leaders are banking our culture being different, and citizens (a delusional one?) being easily fooled (or “conned”) into thinking that we’re in a real recovery, with hopes of incenting the same reckless, risk-taking, speculative behaviors that got us here in the first place. Without truly addressing any of the real problems that ail us, of course.

  33. Invictus says:


    What I cited — with the possible exception of the WSJ, which wasn’t owned by Murdoch at the time — were economic views about a commodity being espoused by political hacks. It was their political views that led them to draw a very seductive economic conclusion, i.e. gas under $1/gallon, that any American would want. If only it had gone according to plan. Which it didn’t. It was the worst kind of partisanship, because it was done in support of sending Americans into harm’s way. And for that I give them no quarter.

  34. DeDude says:


    I don’t think anybody would try to explain and manage an economy without a multivariate model. In other words there is more than one thing that affects the economy. Ultimately growth in private demand has to take over and do the majority of the work (it is after all 70% of our GDP). Keynesianism was never mend to prescribe itself as the long term major driver of the economy. It is a way to stop a downward spiral in the economy, when consumers are cutting back because of bad times and their cuts in consumption are causing bad times to become even worse. When the private sector is again taking up the slack and consumers gain confidence to start spending, the stimulus in form of government spending can be reduced. What Krugman is saying is that the Brits are to optimistic and fast at reversing into “paying back the stimulus accumulated debt” part of Keynesianism. His argument is that the private sector is not ready to absorb the huge number of fired government workers (equivalent to 3 million in the US) and I think that is true. Our economy growing at 3% would not be able to absorb 3 million unemployed people before their lack of employment became a serious drag on the growth. If you have a beef with Krugman then it is up to you to show that something like that has been done in US or UK or a similar country. Good luck with that.

  35. rktbrkr says:

    Soaring oil & commodity prices is the tip of Uncle Ben’s hyperinflation ice berg. Food prices are heading up too. Food & energy costs aren’t computed when measuring inflation – it’s just a problem for the “little people”

  36. rktbrkr says:

    Oil up to $80 with weak demand and no mideastern wars? Just the weak dollar and inflation resulting from the Fed’s printing press. $4 gas and 10% unemployment won’t feel like a recovery to a lot of people. Bernanke is taking care of Wall street and leaving the scraps for main street

  37. pulaski says:

    @Invictus: It was the worst kind of partisanship, because it was done in support of sending Americans into harm’s way.

    On average, I think the Americans were the harm and several million Iraqis were put in “harms way” and about a million of them in the ground (excess deaths estimates). A couple million ethnically cleansed.

  38. Andy T says:

    It’s always interesting to see how people’s biases show through by whom they choose to criticize/make fun of…highlighting quotes made seven years ago.

    C’mon Man! I’m sure you’re better than this….

    This seems like a bit of a “cheap shot.”

    Very few people* realized in 2003 that pension funds and mutual funds were about to dramatically increase the size of open interest in long dated energy contracts, thus warping the energy market for good.

    Please read Michael Masters’ testimony in front of Congress as to the causes of the energy run up. It was the best and most precise explanation for the high oil prices.

    *GS was probably aware of the tidal wave coming, as they were probably the bank “selling the story” about how commodities were a terrific “uncorrelated asset class,” as if commodities could be an “asset class.”

  39. Invictus says:

    @Andy T

    Cheap shot? Seven years? Last I looked “Dewey Defeats Truman” was still getting plenty of play. Was it the dirty-effin-hippies or the lefties who were pining for cheap oil?

    As the old saying goes, “If the shoe fits…”

  40. Patrick Neid says:

    ” It’s important to keep an accurate historical record — a chronology — of who said what, and when. Not that anyone’s ever called to task, but so the record is clear.”

    Sadly a clear record and a couple of dollars will get you a cup of coffee, maybe. No one, right, left or center has a good predictive record. Occasional home runs for sure but in the long run they revert to the mean of cluelessness. 300 B.A.’s are hard to find–even then they make outs 7 out of ten times.

  41. inthewoods says:

    @Crum “@Calvin Jones and the 13th Apostle, and all the other Krugman defenders (who knew that so many were so enthralled by Krugman? Of course, he is nobility, of a sort, so maybe that explains it).”

    Pointing out that someone is comparing apples and oranges isn’t defending anyone.

  42. sjtall says:

    I know an awful lot of very rich Texans whose wealth is derived from oil and who are die-hard defenders of the Bush presidency. If they thought invading Iraq was really going to lead to oil price decline, the invasion never would have happened. All the conservative predictions in 2003 about oil was a red herring. Funny thing is, the left bought it and condemned Bush for going to war for oil!

  43. beaufou says:

    sjtall, Geopolitical fuck-ups might work out for short term gains but they stink in the long run.
    I don’t know what your point is?
    A few Texans got richer and love Bush, well bravo.

  44. ezrasfund says:


    You are almost right. The problem with Saddam Hussein and the Iraqi oil embargo is that it leaked like a sieve. That meant that there was always more oil on the market than there was supposed to be; all that illegal, under the embargo, black market, deeply discounted oil. This helped push the price of oil below $20/barrel and gas below $1.50/gallon. This is why Saddam had to be put down.

  45. cognos says:

    Eh, oil is pretty irrelevant… And more so daily.

    I think gas peaked at about $1.50/gal in the early 80s. Doubling in 25-years… Ain’t much inflation. And lots of commodities haven’t even done that – gold, nat gas, food, etc.

    Tech is a WAY better asset class.

  46. cognos says:

    I’ll add… We put $0 in energy research from 1995 to 2005 bc oil was so cheap and irrelevant. Last 5yr research and vc spend is 100x what it was in 95.

    That will payoff… And it won’t be good for price of oil.

  47. beaufou says:

    “This helped push the price of oil below $20/barrel and gas below $1.50/gallon. This is why Saddam had to be put down.”
    Total bullshit, oil for food was profitable for everyone including your texan friends, every year Saddam would have a “who wants to buy my oil” show in Baghdad and everyone attended.

  48. Andy T says:


    Here’s the thing…

    The gist of this post, I think, is to suggest: “These ‘very serious people’ predicted the following about the price oil. They were WAY wrong. Therefore, why should we listen to them about anything?”

    That is a really crazy line of reasoning….

    I can tell you, as someone who actually TRADED a lot of oil and energy futures in 2003, I don’t remember anybody calling for $150/bbl oil, or even $100. So, I guess anyone that didn’t envision $150/bbl oil in 2003 is dumb? Or, their opinion on anything else should be discounted because they screwed up that 2003 oil prediction?

    This whole line of reasoning seems a bit disingenuous and sort of a cheap shot.

    Just think you can do better than this….

  49. wunsacon says:


    Well, check this out. Each of those people seem to be anticipating that a “stable” Iraq will lower oil prices:

    >> On the eve of hostilities, …

    >> …If Iraq is defeated in a war with the United States and allied nations, Iraq will need funds to rebuild. Oil exports are the obvious answer…. [Pulled from the article]

    >> An unencumbered flow of Iraqi oil would…

    >> Of course, the largest benefit–a more stable Mideast–is…

    So, first up, each of these groups was providing support for the claim that “invading Iraq will be good for the US economy”. Already, I don’t like them, because they sound like evil accountants to me.

    Second, they guessed wrong about a “stable” Iraq. Many other people read the tea leaves and guessed right. Why shouldn’t I listen to the people who were right and look with greater skepticism at the people who were wrong?

    Third, who says oil prices would go down in an era where China and India are using more, the oil’s becoming more expensive to find, and the Fed is holding interest rates at very low rates? Why shouldn’t I listen to the people who were right and look with greater skepticism at the people who were wrong?

  50. wunsacon says:

    In other words, it’s not simply that they “guessed wrong on a trade”, which even great traders do. But, they mispredicted a macro trend really badly, for reasons that not just look stupid now but didn’t even make sense to me back in 2003 (which is why I invested heavily into fossil fuel companies back then).

  51. DaveO says:

    Another for your list, Enron advisor Krugman circa 2002:

    “The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. ”

    Yes, clearly we needed that bubble. Who gives a damn what any of these guys say now?

  52. DeDude says:


    But Krugman’s prediction (citing McCulley) was correct. They created a housing bubble to replace the Nasdaq bubble. Unfortunately they got trapped in their own remedy, because it is so difficult (if not impossible) to control (let alone orderly deflate) a bubble. Even after you realize it has to be stopped, you know that it will create a lot of pain and destroy your reputation – very hard for a politician to chose good policy if it is simultaneously very bad for politics. That is also why the Fed has to think twice about QE2, we already have begun replacing the housing bubble with a commodities bubble and putting more fuel on that fire will kill the consumer and end up having the opposite effect of what it intend. It’s sort of like they are trapped in a “don’t just sit there, blow something up” moment. The income distribution policies that are the only way to restart the consumer engine that is driving our economy, will not happen in the current economic climate and certainly would not have happened in 2001.

  53. NickAthens says:

    The price of oil should not make it make sense to ship table grapes from Chile to the United States.

    Everytime I buy these I shake my head..

    If oil was priced correctly many of our current economic dislocations would go away and restore local economies.