Sunday, April 26, 2009

Why Crude Oil Prices Rose to $150 in 2008

One of my pet peeves is when someone says that the rally in oil prices close to $150 in July 2008 was due to a temporary speculative bubble. Blaming high oil prices on bubbles is dangerous because it is so inaccurate.

Between September 2005 (see story) and July 2008 the global oil market had run out of spare production capacity for the first time since it began in 1859. Oil prices rose to slow down demand growth and incentivize new marginal supply. The first annual fall in oil demand since the early 1980s began to take place (see story). This created spare capacity once again.

The reason this is an annoyance of mine is that casually dismissing the rally in oil prices as a speculative bubble ignores the huge underlying physical supply issues we are facing and which are being temporarily masked by the current recession.
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