Apr 29 2006

Oil, oil, oil…….

Published by at 3:22 pm under General

For the historians with short memories and for those too young to remember the seventies, I found the following from Barron’s magazine column to be on the point.

LAST WEEK ALSO BROUGHT A SENSE OF DÉJÀ VU from the ‘Seventies in the histrionics over oil and gasoline prices. The same nonsense about “price gouging” and calls for a windfall- profits tax reappeared as if unearthed from a time capsule with a disco ball or an execrable Eagles album. The only thing missing was gas lines of that era, which should tell you something. Aside from spot shortages resulting from the change in government regulations that eliminated the MTBE additive, there was plenty of gasoline available. And though it’s back above $3 a gallon, it’s less than a latte. It’s just we got used to gas being less than bottled water. Let’s see how many Winnebagos will stay parked in their driveways instead of trundling to Nascar races this summer because gas is too dear. Hardly any, I’ll wager.

The irony is that while oil and gas prices grabbed the headlines, crude prices actually retreated last week from over $75 a barrel to around $70.50 before rallying back to $71.88 as tensions over Iran’s nuclear program intensified at week’s end. Friday was the deadline set by the United Nations for Iran to stop its uranium enrichment. Iranian President Mahmoud Ahmadinejad was quoted by the BBC as saying that his country “does not give a damn” about U.N. resolutions calling for Iran to stop its nuclear activities. (Wasn’t there also some unpleasantness concerning Iran in the ‘Seventies?)

I’ll also bet that one of the newsweeklies will show up on the newsstand Monday with a cover story about energy, probably with an oil derrick pumping out dollars or something equally inane. If that happens, energy stocks might be due for a pullback. That would be consistent with the pattern discerned by Paul Macrae Montgomery, publisher of the Universal Economics newsletter. By the time something gets into the zeitgeist and onto magazine covers, it’s probably more than discounted in the market.

…….

Oil companies boomed in the 1970s and early 1980s until the high prices and deregulation stimulated production, so supply caught up with demand and crude prices collapsed to $10 a barrel along the way. There followed nearly two decades of underinvestment amid persistent low prices — until the last couple of years. During that time, investment boomed in technology and telecom, until the bust, which left huge excess capacity (think dark fiberoptic cable) and depressed prices. Booms beget busts, until the malinvestments of the previous cycle are liquidated and the capital is reallocated.

It’s really no different from the hog cycle, when you think about. Demand for the piggies drives up prices, so herds expand. Pork chops get pricey, so consumers switch to chicken. Prices fall and herds get slaughtered until supplies shrink; then prices have to rise enough for hog farmers to start to expand their herds again.

Hope I’m within the fair use provisions of copyright when I copy this here. I do, and you would, have to pay to read the original on Barrons’ web site.

2 responses so far

2 Responses to “Oil, oil, oil…….”

  1. gckon 29 May 2006 at 9:09 am

    Two thoughts:

    If people will really keep driving their RVs to NASCAR no matter what the price, then why don’t we tax gas more?

    The metaphor in the final paragraph is pretty facile. Hogs are a bit more of a renewable resource than fossil fuel. (Though, like expanding hog farms, increased oil exploration has some side effects that kinda… stink.)

  2. Chicagoon 29 May 2006 at 9:37 am

    I agree that gas should be taxed more heavily as it would help solve at least two problems – budget deficits and ‘over consumption’ of a scare resource. Problem is people and their expectations (e.g. cheap motor gasoline is written into the Bill of Rights). Californians, a goofy bunch, revolted when a couple hundred dollar increase in auto registration fees was proposed and the government backed down. No politician is going to suggest a gas tax. But plenty will suggest wind fall profit taxes. Though ‘wind falls’ in commodity markets are in the eyes of those without whatever commodity has become scare.

    Yes, the metaphor was superficial, but I took it to only refer the supply demand cycles. Oil and pigs are different; though you could turn pigs into combustible oil ……….

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