Diary

Goodbye Oil Bubble?

Maybe so. This contains a lot of good points:

Bad news from the Baku-Tbilisi-Ceyhan pipeline – an installation that may not normally draw much of your attention, but which is a throbbing artery of global energy supply, carrying vital oil supplies from Central Asia towards a tanker terminal on the Turkish coast. On some remote, sun-baked plain of Anatolia, an explosion sparked a fire earlier this week, temporarily cutting the flow through the pipeline.

But guess what? Here’s the good news: the oil price did not zoom upwards in response, not a blip, barely a flicker. Actually the price of a barrel of crude has been falling: from a peak of $145 in early July, it came down to $117 and was trading yesterday at $120. That’s almost a 20 per cent drop in little more than three weeks.

If the trend continues into September at anything like the same rate of descent, most of the inflationary spike of the past 12 months will miraculously have been sliced away. This is a dramatic reversal, and it is worth trying to work out why it is happening and what it means.

Read the whole thing. You will note that there is nary a word about “speculation” or “price gouging” driving up the cost of oil. Nor should there be. It sounds as if we are going to have increased supply in the near term, along with new drilling and refining capacities. Additionally, decreased economic activity is helping on the demand side.

In other words, the basic laws of economics are working and there is no need whatsoever to resort to silly conspiracy notions concerning the price of oil. A lesson I hope will be remembered the next time a bubble forms somewhere in the economy.