Crude Predictions

In late 2004, with oil at $50 per barrel, I wrote a contrarian column, taking issue with oil-price doomsters. Once the government had finished filling the Strategic Petroleum Reserve in May 2005, I wrote, the per-barrel price of oil could drop by $10. My prediction was premature. The governments stockpile topped off this past August, but crude prices are now $10 a barrel higher than when my column appeared.

What happened? Hurricanes Katrina and Rita disrupted production and added a risk premium to the price of oil. Events in the Middle East haven’t helped. That said, private inventories have increased by 11% since I wrote that column. The price of oil for future delivery now exceeds the spot price. This price structure implies that inventories are abundant. Barring further unpredictable events, it looks like we will finally see that $10 oil price drop.

Author Steve H. Hanke