Crude oil fell to $50 a barrel earlier this week, the lowest price since early 2005 and a continuation of a steady decline in price since the market hit $80 a barrel last year. Why those greedy oil companies would continue to allow crude oil prices to fall after last year’s election (rather than simply before) has not yet been explained by the O’Reilly-type conspiracy theorists, but Clear Thinkers favorite James Hamilton analyzes the data and concludes that there has not been any dramatic shift in the underlying market forces that would explain the decline. Professor Hamilton believes that fundamentals generally drive the price of oil, so he notes the trendy belief that speculators in the oil markets drove last year’s price hike:
What about attributing the run-up in oil prices almost to $80 a barrel, and now the latest drop back near $50, entirely to speculation, without any reference to fundamentals? The reason Iíve resisted that hypothesis is that itís based on the premise that the folks who manage these funds are just throwing their money away.
Thus, Professor Hamilton observes:
Until U.S. and Chinese oil demand are kept in check, and until big production increases are forthcoming, it’s hard for me to see how the price could continue to plunge.
My advice to would-be speculators remains that fundamentals are ultimately what must drive the market. Anyone who believes otherwise should not expect to hang onto their wealth for long.
Check out the entire post, as well as some of the insightful comments.
