Tuesday, May 13, 2008

Cheap Oil Tomorrow

Or so the sign says in Uncle Sam’s Petroleum Saloon, a.k.a. the US Energy Information Agency. Take a look at the monthly forecasts from February to May—the price of oil is always supposed to go down, wherever it is. I’d love to look at the model that generates this serial silliness.


(Thanks to Kevin Drum.)

8 comments:

  1. Oh come on such a model is easy to make.

    1. Rate of change of price is a function of the difference from actual price and calculated long run equilibrium price
    2. The long run equilibrium price model is learn resistant.

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  2. Well that's exactly it, although it would be interesting to see how the LR price is constructed such that the additional data points don't affect it. And by data we shouldn't think only of prices but also new information about demand and supply trajectories. One such model would be a world in which the LR price is a fixed number given by an agency report several quarters ago and that can't be changed until the next agency report several quarters from now. Just thinking about this gives a little lift to my morning.

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  3. If you checked the forecast of the major econometric services you would find exactly the same thing.

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  4. Well, I keep reading in various places that the current approximate marginal price for an extra barrel of oil is about $70, upper limit. So, any assumption of any sort of degree of competition (and OPEC does not control the majority of world oil production) would tend to send the price down back towards something like that.

    Might that be an argument for the "speculative bubble" theory? Maybe.

    Barkley

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  5. Barkley, let's clarify this. By "marginal price", what do you mean? Not the spot price, since that is up, up, up. Not the marginal cost, since scarcity rent is in excess of that. So I'm unclear on the point.

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  6. Oil has storage costs. Contango.

    (Remember when Larry Kudlow was amazed that George Bush knew about it. George "I ran oil companies" Bush? That was when we knew it was over.)

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  7. Peter,

    The textbook definition of MC, the extra cost of producing an extra barrel of oil.

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  8. basic physics shows what goes up must come down; tegmark's 'shut up and calculate' shows that physics is math, hence after a certain point sequences of numbers (e.g. 1,2,3.....) must start decreasing. (this is called 'negative temperature'.) so, prices will come down. trust me.

    also, most reasonable people don't believe the ludicrous 'peak oil' theory (like global warming myths, and the 911 official story that the WTC is not still there ) and follow the geo-philosopher Mirowski. They show that when prices get high, temper(ature)s flare, and this speeds up conversion of 'abiotic' rocks into oil which is also dragged to the earth's surface to fill the national patroleum reserve, due to the force exerted by high prices. (because high prices are larger numbers, and they are proportional to mass, hence they gravitationally attract the abiotic oil to the surface. this is actually say's law.)

    another theory might be that when prices go up, people will switch, to say Camels, and hence oil will no longer be seen as having any value. I already have switched, and now run my Humvee on gold.

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