Why oil prices soar and dip

Marketplace Staff Aug 14, 2008

Why oil prices soar and dip

Marketplace Staff Aug 14, 2008


Kai Ryssdal: Oftentimes with commodity prices, it’s not what happens on any particular day that you ought to be worried about. It’s the long-term trends that’ll get you every time. That’s especially true with oil, where both the commodity and its prices seem equally volatile. Charles Maxwell’s been tracking the oil industry for almost 50 years. So we figured he was as good a person as any to ask about what’s going on with crude prices today. Mr. Maxwell, welcome to the program.

Charles Maxwell: Thank you, Kai.

Ryssdal: What’s your best guess for a rational, reasonable price for a barrel of oil right now?

Maxwell: Well, [laughs] there’s nothing reasonable or rational about the people that are making these guesses, including myself. So, it’s a tough one. But, given everything we know, looking back historically, I would say something between $70 and $100 a barrel is a rational price for oil at this stage. Reasonable? I’m not so sure, because the increases have been very harsh, very fast. But I think it is rationally about in that area, because we are getting a lot tighter in our oil supplies today than we were when most people grew up.

Ryssdal: All right. Well then how come three-and-a-half weeks ago, we were paying $147 for a barrel for oil, and now today it’s $110, $115?

Maxwell: Well, you know from football that there’s a wonderful analogy there when one man tackles the ball carrier and they go down, that should be it. But there are a lot of people that pile on. But we’ve all understood that at some point, like childs blocks, this thing has piled so high that it gets creepy, begins to sway and finally it topples.

Ryssdal: A couple of years ago, though, you wrote that you thought oil was gonna go to $200 a barrel.

Maxwell: Yes, still do.

Ryssdal: You still do?

Maxwell: Yes.

Ryssdal: All right, what’s your analysis?

Maxwell: Well, still do in the sense that over the next five years, I’m thinking particularly, I have a forecast of $300 a barrel in 2015; I have a forecast of $200 a barrel by 2013.

Ryssdal: All right, that sounds a little painful.

Maxwell: Well, it is, but remember of course, that it won’t be, you know, the dollar will not be worth quite as much because of the effects of inflation.

Ryssdal: So do a little trend analysis for me, then. As oil went from $50 to $60 to $70, all the experts were saying, “Oh boy, you know, when it gets to $100 a barrel it’s going to have to stop there because the economic pain will be so severe. And then it went to $120, $130, it hit $147 dollars a barrel.

Maxwell: That’s a good point.

Ryssdal: And we’re still functioning economically.

Maxwell: Well, one thing was that oil was 4 percent of industrial costs as a whole in ’73, ’74, and today they’re about 1.6 percent of our industrial costs. So oil as an important factor in the costs involving industry has fallen tremendously.

Ryssdal: You know, if you’re right, Mr. Maxwell, and oil goes to $300 in the next five or 10 years, you’ll eventually have talked yourself out of a job, because we won’t be talking about oil anymore, we’ll be talking about solar and wind. I mean, there is an upside to all of this.

Maxwell: Yes, there is. Although the problem really is that oil is such a wonderful product. We have built a civilization based on cheap oil, and now the big challenge is going to be how, as we use up this oil — we’re now reaching the peak of production that the planet will take — how are we going to live on these other fuels? We have coal still, a lot of it to go. We have the whole nuclear game lying ahead of us, and we haven’t taken very good advantage of that over the years, but we will have to in the future. So there is an ability to move away from oil toward these other fuels. We have to start the effort and use American ingenuity to really do it.

Ryssdal: Charles T. Maxwell has been covering the energy industry for a very, very long time. He’s currently an analyst at Weedon and Co. in Connecticut. Mr. Maxwell, thank you for your time.

Maxwell: Thank you.

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