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Selling Oil Short

Monday, April 28, 2008
Let me preface this by saying that I am not an economist, I am not investment advisor, and I am not an expert. That said, I'm going to make the following prediction: Oil futures, currently trading at right around $120 per barrel, are going to drop below $60 per barrel in the next two years.

Oil prices have doubled in the last year and a half. At $60/barrel, which seemed high at the time, people were starting to talk seriously about alternatives, both in sources for oil and to oil itself. Fast forward a year and a half, and suddenly oil's at $120 per barrel. Traders are driving up the price of oil, which, in accordance to the basic rules of economics, is starting to weaken demand.

Yet, as has often been pointed out, "America is addicted to oil." In the face of this addiction, there are those who feel we will end up paying any price to feed it. I believe that we will find a replacement. You see, I think there are plenty of alternatives to $120 per barrel oil. With prices that high, there's plenty of incentive to develop an alternative that's profitable at $100 per barrel, or lower. As these alternatives start to enter the market (as well as oil fields that weren't profitable to develop at a lower cost per barrel) the demand for oil will weaken more, and the bubble will burst. Someone will blink, and oil prices will plummet quickly.

I further predict that OPEC will then try to decrease output to keep prices up (by lowering supply), but by that point it will be too late. With enough alternatives available, oil will finally be forced to compete, and those that have enjoyed their healthy profits thus far will be in for some lean times.

Just remember, you read it here first.


Anonymous Anonymous said...

if it weren't for those damn lobbyists, i may actually agree with something in this post.

8:03 PM, April 28, 2008  
Blogger Grant Factor said...

Everything you said in your prediction is probably true... except for the predicted decline in demand for oil. True, demand in the U.S. will most likely decline (people won't be able to afford to drive as much, so they will consume less, AND increased prices will drive innovation + investment). However, demand on a global scale will most likely rise in the face of this, owing in part to increased oil consumption in India and China as those economies further develop a consumption-based middle class. Guess how many miles of freeway China built last year... (modeled precisely after the interstate system in the U.S.)


9:53 PM, April 28, 2008  

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