Oil Prices

Above is the latest data the EIA has for the spot prices of WTI and Brent grades of light oil (which are essentially the prices of light oil in the middle of the US, and in Europe, respectively).

I've plotted from the beginning of 2007, showing the later stages of the 2005-2008 price spike, which then broke during the great recession, before bottoming out at the beginning of 2009.  Recovery in prices was gradual, but there was a recent spike probably mainly caused by events in the Middle East, and particularly the ongoing loss of Libyan oil starting in late February of this year.  Since April, prices have been retrenching a bit as the global economy has slowed, suggesting demand will be lower.

It's extremely difficult to predict oil prices, since both supply and demand are the sum of many hard to predict factors, and the price depends on small difference between the two, which then get multiplied by an enormous factor because oil demand is so inelastic.

Still, I have my guess.  While I think the current retrenchment may continue fitfully for a little while, at some point later in the year I expect the underlying pressures of rapidly growing emerging market demand and constrained supply to start pushing prices higher again.

Leading reasons to disagree:

• You don't buy my hypothesis that the troubles in Europe will not cause major problems for the core countries there.
• You think China will crash in the near term.
• You think Saudi Arabia will indeed sharply boost supply in the near term.

Then of course, there's always the unknown unknowns - a revolution here, a war there, a big oil spill in a politically sensitive place, a supervolcano.  Any of these could completely change the landscape on short notice.

Update: commenter Datamunger alerts me to this "unknown unknown":

International Energy Agency (IEA) Executive Director Nobuo Tanaka announced today that the 28 IEA member countries have agreed to release 60 million barrels of oil in the coming month in response to the ongoing disruption of oil supplies from Libya. This supply disruption has been underway for some time and its effect has become more pronounced as it has continued. The normal seasonal increase in refiner demand expected for this summer will exacerbate the shortfall further. Greater tightness in the oil market threatens to undermine the fragile global economic recovery.

In deciding to take this collective action, IEA member countries agreed to make 2 million barrels of oil per day available from their emergency stocks over an initial period of 30 days. Leading up to this decision, the IEA has been in close consultation with major producing countries, as well as with key non-IEA importing countries.

It's possible news of this already leaked to the market and affected prices, which fell noticeably in the last week or two.  I don't think it will affect prices in the medium term.