No Oil Bubble in 2008

It’s really hard to defend the efficient markets hypothesis.  The theory seems so unrealistic.  I recall that when I began blogging in early 2009 the price of oil had just plummeted from $147/barrel to about $38/barrel.  It was hard to explain to people that the price of $147 was completely rational, given what investors knew in mid-2008.  That demand from developing countries had driven prices sky-high, not nefarious “speculators.”  Thus I had frequent debates with commenters.

But guess what happened.  When output recovered in the developing world prices shot right back up.  Not all the way to $147/barrel; after all, output is still quite depressed in the developed world.  But well over $100 for the so-called Brent crude (West Texas prices are currently distorted by pipeline limitations.) So now we know that speculators weren’t the cause of high prices in 2008, it was actual demand for oil.  James Hamilton is one of the world’s leading experts on oil prices, and he is very concerned about where we are going to get the oil to meet rising demand in countries like China:

In any case, the deed is now done, and the IEA has run an interesting experiment for us in how oil markets function. But I would recommend against further SPR sales, regardless of the final outcome of the current effort. The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we’re talking about an oil price above $100/barrel in the first place.

Never sell the EMH short.  No matter how wrong it seems, no matter how irrational markets may seem, there is usually a rational expectation.

About Scott Sumner 491 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

1 Comment on No Oil Bubble in 2008

  1. OPEC, Libya and the laws of supply and demand are not responsible for high gasoline and oil prices. The oil price is dictated by the fraudulent “round-trip” trades of the “dark pool” trading in the Intercontinental Exchange (ICE) in Atlanta. The international Big Oil/ big banking cabal owns ICE. ICE operates outside of U.S. law. The Commodities Futures Trading Commission does not have any jurisdiction over ICE, bribed by Big Oil. ICE’s energy traders and speculators can ratchet-up the oil price anytime they feel like it, for their own profits and on the behalf of Big Oil, through the use of “round-trip” trades. Google the “Global Oil Scam.” ICE is a super Enron. Oil is too critical a resource to be controlled and manipulated by greedy speculators, greedy traders, greedy refiners and greedy corporations.

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