A Crock of Boiling Oil

One of the most interesting things that I have seen over the past year has been the run up in oil prices.  In September last year, oil was at just under $70/barrel.  Until prices suddenly took a dive the past two weeks, oil was within sneezing distance of $150/barrel.  There were people who projected $200/barrel or greater as something that was inevitable.  While I don't want to declare victory over these chumps yet, I'm getting closer to saying I told you so.  While $200/barrel isn't unreasonable, it is unlikely.  Of course, if it happens in the next hundred years, I fully expect people to claim that they said it first.  The problem is that they were treating oil demand as so inelastic it was practically a giffen good.  The first problem with this was data showing that people were driving less and/or buying more economical cars.  Second was the drive to increase our reliance on alternate energy sources (nuclear, wind, solar, hydro, etc). Third was the political push to actually open some new areas to oil exploration here at home.  With these forces gathering (and picking up steam with every dollar increase at the pump), you had to see that there was a bubble there.  The first sign of the bubble was the panic buying.  You heard that Angola had a little instability or that the front fell off of a tanker?  It's time to bid it up some more.  The second was the classic volcano pattern.  Things were stable...stable...stable, then it took off like a rocket.  When the real estate bubble popped, you'd think that would have warned people of the same thing happening in commodities.  Instead, they piled in more.

Sure, there are some legitimate reasons for the high prices.  The US Dollar is still far weaker than it should be (although it's not in a bubble situation, I do see the dollar gaining back some significant ground on the Euro), there is still a somewhat tight supply/demand situation, and Mr. Fusion isn't around to power our cars yet.  Nevertheless, the rapid drop to the $120 level showed that the bubble just may have burst.  I wouldn't hold out for oil to go back below $100 anytime soon, but I wouldn't be surprised to see prices stabilize at the $115-$120 level for a few weeks.  After Labor Day, a drop to around $100 wouldn't be out of the question.  Of course, are we going to see those blessed days of $10-15/barrel oil like we had in the late 90s?  That's highly doubtful, but $50-$70 is not unreasonable long term, and that could be high because I've become conditioned to those prices.  At the same time, I know that we're not going to have to fuff about with $5/gallon gas for the time being.  Very long term is uncertain, but I think before too long we'll see the return of sub-$3/gallon gas.  We'll also see the end, for now, of people predicting the gloom and doom of things that they don't know about (at least in regards to oil).