Sunday, January 2, 2011

Real Time Oil Prices - Economic barometer

I have added this real time oil price chart to the blog heading courtesy of There are several reasons for doing so.
  1. Classic bubble chart - many financial bubbles show the pattern of this oil price chart. From 2000 to 2007, oil prices gradually increased, then the speculators took over and prices increased at an accelerated pace. Followed by the crash in 2007-2008 and prices fell excessively below the long term equilibrium price. Upon a vigorous short recovery until mid 2008, oil reached their 'equilibrium price' and increased thereafter at the same pace as before the peak. Assuming no speculative peak, extrapolation of this chart suggests that we will be reaching $100 oil in the first half of 2011.
  2. Authors such as Jeff Rubin suggest that not sub-prime lending but unsustainable oil-prices caused the last recession, just as at previous oil shocks. Now that conventional oil production has peaked in 2006, even acknowledged by the EIA, it seems that oil prices can only go up along with world oil demand. But world economic growth and globalisation are dependent on cheap oil. When oil prices go up too high, China can no longer compete with local producers and we may experience another significant recession. So... when a new oil price peak develops or if we reach oil price levels approaching the 2007 peak we may be in for another recession. Thus, oil prices could be seen as the proverbial canary in the coal mine. Being such an important leading indicator, the oil price graph definitely deserves to head this forum.

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