Oil was at $147 per barrel in July of this summer. On Friday, about three months later, it was at $64.
The Canadian dollar, one year ago, bought more than one US dollar. On Friday, the US dollar bought 1.28 loonies.
This is incredible volatility, and to be honest, is quite hard to explain on the basis of fundamentals.
I was predicting for a long time that oil prices were too high, and that the economic forces of demand cutbacks and supply increases would bring us back from the skyhigh levels we were seeing. But the price went much higher than I would have anticipated, and it took a long time for the price to peak and start falling. Then once it started falling, it just has not stopped.
Either the price significantly overshot in the last year or it is now seriously undershooting -- or, very possibly, both.
Could it be that investment flows from hedge funds and general investors caused this incredible volatility? Or is it just that given the uncertainties in the world at this time, value is so hard to pin down? It is still true that oil demand and supply are both very inelastic, so in a sense you can have prices move a lot and not be too far away from equilibrium in regard to quantity.
Whatever the reasons, it is hard to make investments in alternative energy, or in oil production, given the volatility. As with the credit crisis, financial market turmoil has real effects.
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