Oil prices surged to a new record today, briefly topping $50 a barrel.
Now, there’s nothing inherently significant about crossing the $50 threshold—it may have a minor psychological significance to people who follow oil markets closely, but that importance is more symbolic than substantive. Still, I’m sure that this “event” will get coverage in tomorrow’s newspapers.
There are 2 things that today’s petroleum news brings to mind. The first is how vulnerable we’ve made our local economies to international unrest. It seems that any oil supply disturbance, anywhere in the globe, sends prices up. Today, it was unrest in Nigeria, coupled with the delayed effects of hurrican Ivan. Tomorrow, who knows? But because there’s no shortage of calamity in the oil-producing regions of the world, the one thing that’s sure to be in good supply is uncertainty. And that uncertainty raises the price of oil—sucking money out of the Northwest economy. After all, we don’t make much oil here in the Pacific Northwest, so we have to export money out of our region in order to import our petroleum.
But the second thing worth noting about the oil price runup is just how bad futures markets can be at predicting future prices. Take a look at this graph of the price of oil futures contracts for December delivery:
For people who aren’t as obsessed as I am about energy markets, here’s what it means: For years, professional commodity traders were betting that oil would cost under $25 a barrel this December. In 1999 (well before this graph starts) the bet was for $16/barrel today. Even the start of the Iraq war made little impact on oil prices. But now, as December approaches, the predicted price is $49. (That’s going to make a bunch of people who bought oil contracts in 1999 very happy, and a bunch of people who sold them pretty upset.)
This is just one of many reminders that futures markets represent a guess—and that even people whose livelihoods depend on it can’t predict the future. Which is why I never make predictions, especially about something as volatile as energy prices. On the other hand—that’s quite an upward trend on that graph, wouldn’t you say?