Why the Hysteria Over Oil Prices Is Overblown
Wild stormy weather stops us in our tracks. Factories close. Offices are abandoned. School is cancelled. After the rush to stock up, stores are shuttered. And when the storm hits, it’s all we can think about — especially if the power goes out.
It can seem like an eternity, and can obliterate any pre-storm memory. This sounds eerily similar to the oil price tempest we are in the middle of right now. Today’s price seems like the only reality, except that the plunge is still on. Are we going to survive this thing? Can we ever expect a return to calm?
Dial in to the news, and you’d be tempted to think not. It’s natural that storms bring about their own brand of myopia, but that’s when experience should make us wiser. And we all have a lot of that to draw on. We only have to rewind back to 2008 to see a very similar situation to today’s. Back then, oil prices slid from well over $100 per barrel at the peak to $40 at the trough, all in about five months. Currently, prices are tumbling from just over $100 to just over $40 over a six-month span. Just eyeballing the raw data, the similarity is staggering. So are other key features.
Both episodes were preceded by positive predictions. Back in 2008, fears that we were running out of oil led to very believable predictions of imminent $200 per barrel crude. Supply constraints in the 1970s led to very similar longer-term predictions. In today’s case, predictions weren’t as wild, but in general forecasters preferred to believe that a return to global growth would keep prices in the triple-digit zone. Funny how diametrically wrong pundits can be, even with a wealth of instructive recent experience.
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