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October 23, 2008
Share ThisAs money flees the market in bucketfuls, the price of black gold has collapsed like the froth on yesterday's cappuccino.
Not long ago, George Soros and a bunch of other guys whose IQ forms a significant multiple of my own testified before congress, saying:
"While much of the run-up in the price of oil is driven by tightening supply and growing demand, especially in the developing world, the entrance of new investors into the energy markets--from hedge funds to university endowments--has flooded the markets with money and caused the price of oil to diverge from fundamentals."
A commentary running today by Reuters columnist John Kemp also takes this view with the benefit of today's perspective:
"In the short-term, the influx of investment money drove prices far above their medium-term sustainable level. But as some of that investment money leaves the market, there is a risk prices will fall below their medium-term sustainable level on the way down."
Easing energy costs should be a much-needed boost to the economy. And the dollar seems to already be strengthening. Although I can't say for sure how much of that is attributable to oil alone, overpriced oil and a weakening dollar do seem to have a circular relationship.
If anxiety over gas prices begins to ease, that should be good for Detroit, who are begging people to buy the gas slurping models that still crowd their showrooms and production lines.
Where it will not be so welcome is in the alternative energy sector. Solar was flirting with grid parity at the wildly inflated prices we saw recently. With oil dropping so precipitously, I'd be surprised if there is a big move in solar and wind in the immediate future, unless a new administration actually enacts a big commitment to renewable energy. There's been plenty of rhetoric on the campaign trail, but cheaper oil and more urgent economic woes may move renewables to the back burner for a while.
Does anyone else have thoughts on what this does to the energy stocks? Maybe foreign solars will have better luck than those based in North America? It does seem China and Europe have more of a long term focus that would benefit their local producers.
