I've been quite busy traveling, crunching numbers and writing. I am late in finishing a post on what eats my days, of late, visibility indicators. Probably another 2 weeks before I can find the time. So let me apologize for venting some frustration. On oil prices. And on the procession of grave looking analysts sharing their projections on how low the barrel will go.
Am I the only one cringing whenever a commentator shakes his head in disbelief over the falling price of oil? Has anyone noticed that prices are falling to the level at which they were 2-3 years ago? Has anyone wondered how emerging economies could sustain the recent prices at which oil was traded?
I am not saying that I understand or can forecast better than anybody else. But I am profoundly irritated by those who do (say that they know).
So, for my education, I searched for historical data. Thanks to the Energy information administration, here it is, all the way back to 1859. This is not a typo. More than a century of prices. And here is how it looks like:
Series like that are never easy to understand, because exponential growth obliterates older data points. Better to take the logs. In case you have no idea what a logarithm is, let's just say that it removes the main curvature in a series. Easier if you look at the chart below (starting in 1900):
Same data as the first chart, except that this time, this is expressed as the power of 10 (well, the log base ten actually). So when you read 1, it means a barrel at $10. When you read zero, it means a price of $1. When you read 2, a price of $100. Well, you probably get the idea.
Magically, the chart starts to be intelligible. It is more or less a straight line, moving around in irregular cycles.
So?
Well. For one, when the price hit 147, (2.16 on a log(10)), that was newsworthy. A value of 2.17 is off the chart, especially if one notices that 2007 had not jumped much higher than 2006.
Two, it "looks as if" when prices fall significantly, they take a long while before climbing back to the previous level.
But then, obviously, all depends on your understanding of the data. I read tonight than some major broker had forecast a rebound to $100 (2 on the log scale) within a year. That could make sense if you use only recent history (i.e. starting in year 1998 onwards) to extrapolate. You would say that 2007 was a slow year, 2008 a spike, and that 2009 will return on the "trend line".
On the other hand, there were not that many years of free-falling oil prices during the past century. I see three bad years following the peak of 1920, and 1997. I also see two major peaks (1920 and 1982) after which the world economy has adapted.
So my personal inclination would be to bet on a rather long contraction. With repercussions everywhere.
But what worries me the most is to read predictions such as the one I mentioned above, out of the blue, and with this amazing quote : ``We're in a global recession now, and you've got to be
close to the bottom[...]" reported by Bloomberg, as carried by CNBC, as made by Boone Pickens...
Last time I looked, the world economy was still growing. We might certainly be entering a phase of contraction of the global economy, but we are not there yet. Not at all.
For reference, the latest IMF forecast was a global growth of 2.2% in 2009. And it was made on November the 6th.
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