Michael Giberson
An article by Sarah Kent in the WSJ, “Gulf in oil prices may set up market for a fall,” takes notice of wide gap that has emerged between the current price of oil on the world market and the futures price of oil a few years into the future.
A variety of explanations for recent prices have been tossed around, from peak-oil related tightness in the market (aka “scarcity rents” in the jargon of economics), political unrest in some key oil exporting nations, use of commodity markets as an inflation hedge, or simple manipulations of evil speculators.
Here is the WSJ chart illustrating the matter:
The evil speculator story is mostly a useful story for politicians and regulators to grab more power over financial markets that lacks substantial evidence in support. The inflation hedge view would require future prices to be higher, not lower, than current prices. So is it peak oil or political unrest (or maybe some other view)?
The article notes that some analysts attribute the gap to an increasing expectation that oil production capabilities will rise, so future prices have eased, contrary to the beliefs of at least some peak oil advocates (for an example, see this post at the Scientific American blog). I’m sympathetic to the resource optimist view, but I think political unrest is the more obvious explanation.
The timing of the price moves in the WSJ chart are quite supportive of the exporter political unrest story. Both the May 2012 and December 2018 prices begin a sustained rise at the end of 2010, when the Tunisian Revolution erupted and began to spread. After about three months, though, the December 2018 price eased while the May 2012 price continued upward – this is approximately when the Libyan civil war became hot. The pattern would reflect an expectation that Libyan oil exports would not recover fully by mid-2012, but the market anticipated production would recover by 2018.
Note the most recent divergence between the May 2012 and December 2018 prices, emerging during the escalating political conflict surrounding Iran. The near term price is up $15/barrel while the more distant price has been unmoved by the conflict. Market concern about a potential interruption in supply, but not one that will endure, seem an entirely sufficient explanation.