September 20 was the last day of trading in the October NYMEX crude oil contracts. They closed at $83.32 per barrel, an increase of $1.39/bbl over Wednesday’s close. This is a truly amazing price for crude oil, nearly $2.00 per gallon. People who were forecasting prices like this a few years ago were considered crackpots. Today, it’s “ho hum, what else is new?” Meanwhile, the value of the Euro gained another penny on Thursday. You now need $1.41 to buy one Euro--a record price. Experts attribute this increase to the decline in U.S. interest rates triggered by the Federal Reserve’s decision earlier this week. The upshot is that the dollar just isn’t worth what it used to be when measured either in oil or in Euros. Media accounts of oil prices continue to claim that today’s price is not an all-time record, because prices in 1980, when adjusted for inflation, would be more than $100/bbl in today’s dollars. I have no idea what 1980 oil price they are talking about as NYMEX didn’t exist in 1980. For 1980, Energy Information Administration reports only the average annual price paid by U.S. refiners for imported oil. When adjusted for inflation, that price is well below today’s price, but today’s price is not an annual average, either. The world is nowhere nearly as chaotic today as it was in 1980. The so-called oil crisis of 1980 was triggered by the Iranian revolution. The panic generated by political events created the “crisis” and prices went through the roof. A few years later there was a glut of oil and the price hit rock bottom. The current mess in Iraq has not made much of a dent in Iraqi oil production, certainly not enough to explain today’s prices. Today’s crisis is caused not by politics but by a lack of oil sufficient to meet increasing demand. Nor is there any expectation that oil prices will hit rock bottom in a year or two unless the global economy utterly collapses. These are interesting times for an energy wonk like me. I chuckle at comments in the trade press in which some pundit declares that the “right” oil price would be $60/bbl (or some such number). Nonsense. Oil prices are no longer connected to fundamentals such as how much it costs to find more oil. This is a sellers’ market and the price is whatever people are willing to pay. Are we going to stop driving because unrefined crude oil costs $2.00 per gallon? I doubt it. As far as I can see, there is nothing to limit oil price increases except economic collapse. I’m reminded of the electricity “crisis’ in California caused by lack of supply. In that case, supply was limited by manipulating generators. The market collapsed and government stepped in to arrange supplies. We are now witnessing market failure in the global oil market, but few believe it is because the Saudis are behaving like Enron. Even though producing countries are pumping almost as much as they can, oil production has been dropping for more than two years. Today a dollar can buy only two quarts of crude oil. The dollar may not yet be worthless, but it is certainly worth less.
