It was just a few months ago that we posted the chart above and similar ones on the parabolic increases in the price of oil. We had the feeling back then that things had gotten crazy and that prices were nearing a peak, but we were early. As one oil analyst noted, “Even if you are the only sane person in the asylum, there’s nothing you can do about” oil prices. But eventually things do change. Here’s that chart as of today, with the even steeper decline in natural gas prices in red.
If the free fall in natural gas prices is an indicator, oil prices should go much lower. We wonder what role, if any, control of oil or the oil price decline played in Russia’s timing of its Georgia invasion, since Gerogia’s strategic Baku-Tbilisi-Ceyhan pipeline is the sole “effective alternative to Russia’s pipeline network” and monopoly over supplies to certain parts of Europe.
And then there’s Iran’s OPEC governor trying as well to talk up the price of oil. We observe that there is a reasonable rationale for oil producers to be disciplined about restraining production when prices are going up every day; but when the prices start coming down, producers are incentivized to cheat and to produce more than they say they will, to squeeze out every bit of marginal revenue. We’ll just have to see if that happens this time.