Does Anyone Think Gas Prices Are Going to Dive?

The Seattle Times reported yesterday that Philip Verleger, a noted energy consultant, said that gas prices are poised for a dramatic plunge.

Here is the reasoning. Gas prices have soared in the last two years because of the expectation that demand would increase (with especially China and India) while at the same time supply would reduce (because of the conflicts in the Middle-East and other problems). While these expectations were driving the future prices of oil to the stratosphere, some started increasing their inventories and they are now approaching 1990 levels (which is much higher than what we had a year ago). As a result, the supply curve of oil is now moving again to the right. Moreover, some of the tensions that led to lower supply expectations are easing (e.g., there was no big hurricane over the summer). The consequence of all this is that gas prices may ease dramatically in the next few months and perhaps even dive down to $15 a barrel ($1.15 per gallon in the US!). If the coming winter in the Northern hemisphere is mild, this is almost a sure thing says the article...

What’s interesting in this story is the economic reasoning that specialists of the oil market use to foresee its future. Verleger could be right, let’s see what happens in six months.

Comments

[djconnor]

In a world of infinite alternatives, I have a hard time imagining a sustainably high oil price. In fact, I have a wager with a friend that a gallon of gas will hit $1.00 before it hits $5.00.

I find it amazing how many smart people think that oil is somehow different from every other earthly good that abides by the laws of supply and demand.

I expect that the recent surge in upstream exploration and generation will dramatically impact inventories. Good for consumers, bad for suppliers. Another important note to keep in mind is that general downstream infrastructure has been allowed to corrode through fiscal neglect.

There was a great article in a recent edition of the Economist about the inefficient business practices of state-owned oil companies, which unfortunately, possess most of the known reserve.

[frederic]

I'd be interested in reading the article from The Economist that you mention. Do you have the URL?