Wednesday, August 04, 2010

Why Is Oil So Expensive Right Now?

By Eric Jackson08/04/10 - 06:00 AM EDT

Stock quotes in this article: BP , APC , DO

If you took the average price of oil in 2010 year-to-date, it is the second-highest average on record. The only calendar year to have a higher average price was 2008. Remember those heady days?

Relative to the $150 a barrel oil price of a couple of years ago, maybe the current price - more than $80 -- seems cheap to some people. But it strikes me as crazy that the price of oil today is as high as it was back then, after a five-year run-up in price from a lot in 2002 after the last recession. Back in 2008, after hitting $80 for the first time, the price of oil pulled back a little, before starting a stunning, Mt. Everest-sized ascent to $150.

That $150 a barrel price now, in hindsight, seems unfathomable -- even though we seemed to come up with lots of rational explanations for it prior to July 2008 (just as we did for tech stocks prior to March 2000). When we look back on it now from the cold-light of today, it appears clear that we had hundreds of hedge funds and other hot money investors speculating on the commodity (just as they did with tech stocks) hoping to juice up their quarterly returns.

When these smart money folks couldn't make the price of oil levitate any further, it came crashing down to earth -- first with evidence over that summer of 2008 that China was throttling back its growth and then with the panic selling that fall once the U.S. markets came unglued.

When I think about the world we live in today and the expectations for the next five years of growth, there are many (and it's probably the majority view now) who believe the stock markets' returns in the developed world will be muted. We need to continue to deleverage and work off our sins of the past, before we will be in a position to see our GDP growth start to hum again.

Muted growth should translate into the mother of all jobless recoveries. This means that long-term unemployment will stubbornly refuse to come down to any great extent going forward.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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