The latest fighting in the Middle East has sparked a new round of dire news about the cost of oil, with some reports predicting that prices will soon rise from the current mid-$70s range to a painful $100 per barrel of crude. Scary stuff, but it’s not anything we haven’t seen before. Given that the latest stories are near carbon copies of the hysterics that appeared in the press last summer, we are inclined to greet them with at least a soupcon of skepticism.
On Tuesday, BusinessWeek ran an item from Standard & Poor’s looking at the effects $100 oil would have on airlines, gas prices and the like. While they didn’t say it was going to happen, the fact that they’re war-gaming possible scenarios shows that they’re at least considering the possibility. The New York Times also briefly floated the possibility on Thursday.
But the Chicago Tribune went the furthest out on a limb this week. After correctly discerning that there is a conflict in the Middle East, the Trib plugged some numbers into the widely accepted formula x+y = price = next number that sounds like a milestone = 100 and reported that market movers were feeling jittery that oil could indeed hit the magic century mark.
Lest there be any doubt as to the novelty of this deduction, the paper noted that, “At the beginning of the year, such a prospect would have been dismissed as unthinkable. Today, analysts said, it cannot be ruled out.”
Unthinkable? Let’s take a look. Back in July 2005, when oil was at $61 a barrel, CNN Money reported that “In March, Goldman Sachs said oil could top $100 a barrel.”
That was toward the end of a five-month wave of $100 predictions. In March 2005, the New York Daily News warned that “Oil could gush to $100.” In that story, one analyst — Stephen Leeb, who tracks oil for his own investment firm — said he didn’t think “$100 is even a big deal,” and to prove it he insisted that prices would hit “$250 a barrel in six to nine years.”
How’s that for hedging your bets? It makes good copy, and who’s going to remember in six to nine years if you were right?
Similarly, last July, oil analyst Matt Simmons was quoted in the Guardian saying, “We could be at $100 by this winter” of 2005/2006, to which the paper added that oil prices could “rocket to $100 within six months, plunging the world into an unprecedented fuel crisis.”
We shudder to think what the papers will say if and when there is an actual fuel crisis. “Oil Price Hits $100 Amidst Fire and Brimstone!”
But of course these two analysts might have had a motivation for stirring up an oil scare, as both were shilling books — a fact the newspapers failed to disclose. Leeb had just released The Oil Factor: Protect Yourself and Profit from the Coming Energy Crisis in February, while Simmons’ Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy was released in June. Can you say “interested observer”?
The Guardian article featured one more lesson in the dangers of reporting simplistic predictions, proclaiming that “the Economist Intelligence Unit predicts that oil prices will peak by the end of this year, and decline by 10 percent in 2006 as the Chinese economy slows, reducing demand.” Another “oops” moment, as it turns out. The Chinese economy, as the AP reported Tuesday, has actually “reported its fastest economic growth in a decade … The 11.3 percent growth in the second quarter compared with a year ago exceeded forecasts.” In any case, the Chinese economy in isolation is no more predictive of oil price than is the war in Israel.
A year after all of those doom and gloom predictions, the price of a barrel of oil has been hovering around $73 all week, down from a high of $78 last Friday. Thankfully, reading the wire reports and analysis today, it looks like many analysts — and by default, the reporters who often do little more than ask analysts what’s going on — have talked themselves down from the ledge over oil prices. At least for now.