Irrational Exuberance

The first thing I heard when I woke up this morning was that oil prices had come down as "the energy bubble burst" when new government data revealed that consumption had "gone from guzzling to sipping."

See, this is why I shouldn't listen to the crap news that comes in over the radio since CBC went black.

Let's look at the real story from the BBC:

Oil prices have fallen further on Thursday after data from the US Energy Department said American demand was now below the level seen a year ago.

Analysts said crude was being hit by falling US consumption of petrol and heating oil in the face of high prices....

A barrel of US light crude was down 29 cents to $62.50 in Far East trading, after earlier falling as low as $62.23.

London's Brent crude was also down 29 cents at $59.83 a barrel.

So good news, right? Well, maybe. I'd be surprised if oil fell below $60 - we are still in a supply crunch, after all. If we're lucky, then trading will knock about $5 off the price of oil. Some analysts have been saying that the high price of oil has been due to speculation, and maybe that's true, in part. But I maintain that what we're seeing is the result of simple supply and demand constraints. Just look at this graph:



It's not exactly encouraging, is it? Besides, the warm weather in Ontario can't hold out forever, and then oil prices are going to go back up.

But you look around, and the market is acting like we've slain the oil dragon forever and ever. Hosanna! Let's throw piles of money in to airlines that aren't profitable! Up next: Put your life savings in to the insovent GM!

Seriously. People who think this is the beginning of a trend in oil prices really want to be careful.