Posts Tagged ‘bubble’

Exxon blows it

Wednesday, May 14th, 2008

Bryan Caplan wonders if oil prices are a bubble.

When oil spikes abruptly, that means people made incorrect investment decisions – under invested in exploration, development, and gas to liquids conversion.

A simple back of the envelope calculation tells me they are still under investing. Exxon recently abandoned gas to liquids plant that would be profitable if oil remains above forty dollars to fifty dollars a barrel. But if everyone acts like that – and everyone is acting like that – oil is going to be way above fifty a barrel.

Do I hear someone saying “Hey. Do you think you are lot smarter than the guys running Exxon?”

It is quite simple.  For the price of oil to remain stable at present levels, we need to accommodate China’s industrialization by producing a lot more oil each year.  The planned increases in oil production add up to peanuts.  So the price of oil is heading up, and going to stay up.