The 2008 Oil Price Spike and Collapse in Retrospect

Alan ReynoldsI wrote “Get Ready for the Oil Price Drop” in June 2008 for the New York Post. It proved to be a good and timely call. The price of WTI crude peaked at $133.90 that month before falling to $41 that December.There are obvious differences between 2022 and 2008 (unpredictable warfare andsanctions), but some economic principals I enumerated in 2008 still apply even if the timing does not.Here are a few points I raised in 2008 which may still be worth keeping in mind:“A huge share of crude oil is used to produce and distributeindustrial products. That explains why the price of oil isextremely cyclical – that is, it tends to rise during economic booms and fall during contractions.”“Oil prices have a huge impact on producers ’ cost of production – profits and losses – not just on consumers’ cost of living.”“Nine out of 10 previous postwar recessions began shortly after a big spike in the price of oil. Yet those recessions always slashed oil prices dramatically. People who have been predicting both a nasty US recession and $200 oil prices are contradicting themselves … But note that a US recession isn ’t required to bring down the price of oil. All that’s needed is industrial stagnation or decline in manyother countries. ”“When the price of anything gets unbearably high, it discourages demand. The resulting drop in sales, in turn, causes inventories to pile up and the price to come down.”
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs