Interesting Times

“At around $125 a barrel, crude oil has more than doubled in price since the end of 2006. How is it possible that the vast majority of government forecasters, stock analysts, economists, traders, and journalists who follow the oil market failed to foresee this? Moreover, how can it be that even today, the bulls and bears on oil are extremely far apart, disagreeing not only on the oil outlook but even the present situation?

“The answer is simple. You can't predict what oil prices are going to do even in the short-to-medium term unless you have a good handle on the forces of supply and demand. And that requires thorough and reliable data -- which don't exist...

“The scarcity of good global data is a key reason why it's impossible to know for sure whether the next ‘super-spike’ in oil in the coming three or four years will be up to $200 or more or down to $80 or less. Even though the statistics aren't exact, they're all anyone has to go on, so they still have an enormous impact…

“What makes good information so important in the oil market is that both the supply and the demand for oil are extremely inflexible, especially in the short term. That means even a small, unanticipated shortfall in output… or a bigger-than-expected rise in consumption can send prices through the roof. On the other hand, prices can plummet if demand growth drops because of an economic slowdown or production jumps because some delayed project finally comes on line.

“One indication of uncertainty is the extreme range of bets being made in the oil options market. On May 13, bulls were willing to pay around $1.40 per barrel for a ‘call’ option that will pay off if oil goes over $200 a barrel by next February. Bears, meanwhile, were paying about the same amount for a ‘put’ option that will be in the money if oil goes below $84 by then…

“In other words, there's a big slab of unknown built into the price of oil. Lots of people will confidently predict where prices are headed next, but most of them, including the bulls, have been wrong more than once. Truth is, the world is almost as starved for information as it is thirsty for oil.”

(“Oil's Murky Math; Where are we headed: Up to $200 a barrel? Down to $80? With little good data on supply or demand, oil's next price move is anyone's guess.” Peter Coy. businessweek.com. April 14, 2008)

ONE'S UNCERTAINTY is another's opportunity.

Ambiguity appears to hinge upon where we stand.

1917, 1929, 1941, 1963, 1968, 1973, 1981, 1987, 2001...