Futures and Predictions – Oil

Just a few thoughts on a topic that is becoming increasingly important… the price of oil in the future.

For years it’s been basically true that prices of commodities continues to drop; as prices rise, there is increasing incentive for people to find more of the material, or increase their efficiency of use, or find substitutes, all tending to keep the price from skyrocketing.

However, we’ve now got a world with not just America and Europe and Japan industrializing – China and India are in the game as well. Oil has recently just about doubled in price, and some predict much higher prices in the future, as demand at even increased prices seems to keep increasing. Many are now skeptical about the ability of the oil producers to ‘open the spigots’ – if production can’t be increased (and is at/near/past ‘peak), then it ain’t gonna happen.

An interesting point is that the futures markets are not ‘predictors’ – they are there as hedging/insurance devices. Can there ever be a case where there is general certainty that the price of something in two years will be twice what it is today (without immediately driving today’s price right up to about that level)?

See interesting discussion on some of these points at Econbrowser and The Oil Drum.

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