The outlook for oil: An interview with Hamilton

Oilprice.com has a good interview with James Hamilton from Econbrowser up on their site.  I’d suggest taking a look

As will one day become clear, one of the big drivers of the slowdown in the developed world has been the sharp increase in commodity prices – specifically oil.  While the global financial crisis was a major driver, it is also possible to make the case that part of the reason for the run up in debt was an assumption by households and individuals that the lift in oil prices would be temporary – when in fact it looks like it is a relatively persistent shift up.

As stated here:

James Stafford: Whenever oil prices spike politicians are quick to blame speculators and oil companies for manipulating the markets. Are you in agreement with this – are speculators and oil companies to blame? Or are there other factors that are overlooked deliberately or otherwise by the mainstream media?

James Hamilton: The story is pretty simple, and even though politicians may try to distort it, you’d hope that the media would do a better job of reporting the truth than they have.  World oil production was basically stagnant between 2005 and 2008, even though world GDP was up 17%.  With economic growth like that you’d normally expect increased demand, particularly from the rapidly growing emerging economies, and in fact China did increase its consumption by a million barrels a day over these 3 years.  But with no more oil being produced, that meant that the rest of us– the U.S., Europe, Japan– had to reduce our consumption.  It took a pretty big price run-up before that happened.  To those claiming the price is too high, I would ask, how high do you think the price had to go to persuade Americans to reduce oil consumption by a million barrels a day?

We have seen demand rising (on the back of increasing productive capacity in the developing world) while supply has stagnated.  Many times people have told me “there is heap of oil lying around” – and this is true – but the question is, “what is the cost of extracting this oil”.  Even some of the most optimistic people say that we shouldn’t expect oil prices to fall below $70US a barrel in current dollar terms.

The big saviour will hopefully be technology – higher prices drives the incentive to find substitutes.  However, that doesn’t stop the intervening period being painful.