With oil prices currently at a 19-month low and heading back to $50 a barrel, this is an excellent discussion of the causes of the recent price drop. At least some of the inflated price appears to have been due to speculators who have now exited the market. In the end, as James Hamilton says,
[W]e’re back to the standard equation of how much oil is actually used to make engines go and keep houses warm relative to how much is coming out of the ground…My advice to would-be speculators remains that fundamentals are ultimately what must drive the market. Anyone who believes otherwise should not expect to hang onto their wealth for long.
I always find it astonishing just how many people think they can beat (or, in politicians’ cases, control) the market without taking account of the fundamentals. When people need to make more engines go and keep more houses warm, they will use more fuel and will want to do so as affordably as possible. That is the fundamental issue with energy policy. Any raising of the price to discourage energy use will result either in less engines going and fewer warm houses, or an opportunity cost as spending on those items displaces other economic activities.