The Bouncing Ball of Oil Prices

At the beginning of this year, the world was shocked when oil prices rose above $100 per barrel for the first time in history–nearly ten times their all-time low in 1999.

But the path to $100 was not a straight one, as a chart of the data shows. Even though the overall trend is clear, there were consistent pullbacks throughout the period, most dramatically in 2006-2007, when, after almost hitting $80 per barrel, prices fell sharply to almost $50.

At the time, peak oil skeptics used the drop as evidence to argue that there was “plenty” of oil in the world and that prices would soon be back to normal levels. Close observers of the situation were not fooled, however, as the fundamentals of our oil situation had not changed. (Most major producing regions were in decline, worldwide demand was still rising, and there was no indication that new supply of any magnitude would come on line soon).

By February of this year, prices had bounced back to over $100, but that was only the beginning. From February until July prices rose inexorably, finally hitting a staggering $145 per barrel, prompting analysts to speculate about the possibility of $200 per barrel oil. (Still, few wanted to talk about peak oil or geologic constraints; high prices were overwhelmingly blamed on “speculators” and the restrictions put on domestic drilling in the United States).

Then, of course, prices began to fall, steadily but quickly to almost $90. By the end of August the same analysts were talking about a slowing economy and the fact that for the first time in a long time, Americans were actually driving less then they had been. Maybe oil prices were set to stabilize, or even fall, as we faced other financial problems?

Then yesterday, the price of oil spiked again, with futures soaring nearly $16 per barrel, the biggest one-day jump in history. The reason? According to Marketwatch, oil was “buoyed by a steep drop in the U.S. dollar and speculation that the Bush administration's proposal to stabilize the financial sector might help revive economic growth.”

For a long time advocates of the so-called “free market” argued that peak oil would essentially be no problem, because declining production would create higher prices, which would, in turn, spur innovation and a switch to alternatives.

That might be true if there were any such thing as a free market, rather than what we have: a confusing stew of market manipulation, nationalization of reserves in oil producing nations, (and the nationalization of major institutions at home) the implicit and explicit subsidizing of consumption, financial bailouts and non-bailouts (capitalism as Russian roulette) etc. etc. How can anyone still believe in the free market when the market is not only rigged, but rigged in ever-new, ever-changing ways?

Keep an eye on oil prices; but don't expect them to give you more than a general clue as to where the world is going. Things are about to get a lot more complicated than that.