Betting on oil prices

The current futures price of oil for December 2010 delivery is $39 a barrel.

It seems to me quite plausible that in the long run the price of oil will be, by today’s stadards, catastrophically high,* and policymakers and private-sector planners ought to be thinking about that prospect.

But the question of how much oil will cost five years from now is a separate one. Jane Galt reports that the big oil companies do their internal planning based on $30-40 a barrel (in dollars of today’s purchasing power, so you need to add about 10% for general price inflation to those figures to get a nominal-dollar figure for five years out). So it seems to me that people who bet now on higher prices five years from now are probably taking the wrong end of the bet.

In addition, there are long futures markets in oil, and the December 2010 contract is now trading under $39 a barrel. (Actually $62; see correction below.) That’s not a prediction, of course; oil could be at $200 a barrel then, or at $20. But it does mean that if you think oil prices are going to hold at this level — never mind keep going up — there’s no need to find a betting partner in order to back your opinion with cash.

On the other hand, if you find betting more exciting than buying commodity futures, and are willing to bet serious money on rising oil prices, just drop me an email. I’ll be happy to take your bet and then hedge myself in the futures markets.

Update and correction A reader points out that the $39 figure is seveal months out of date, and provides the currently correct $62. That seems to me like pretty bad news, though still better than current fears make it. I wonder how it reconciles with Jane Galt’s report of oil company planning figures?

*China’s current GDP, which is now about 60% of ours, and has been growing at better than 8% per year for a quarter of a century, which means it doubles every nine years. At that rate, in another quarter-century China’s GDP per capita will be at about the current US level, which suggests a couple of hundred million cars on Chinese roads. No matter how optimistic you are about Venezuelan tars and Albertan sand, it doesn’t take a very sharply tilted supply curve to translate that level of demand into much higher prices.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: