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Rising oil prices prove economists wrong

Has Andrew Bailey been caught out on oil prices? Credit: Getty

March 25, 2024 - 7:00am

Oil prices are rising again. European Brent prices have risen from their recent low of $74 per barrel in mid-December to $86 per barrel last week, an increase of just over 16% following a sustained decline. When, in late September, Brent hit $97, most analysts assumed that the price would continue to increase as Opec+ committed to ever-increasing price cuts.

The decline in prices between September and December was therefore very strange. Most economists and market analysts assume that Opec+ effectively set the price in the market outside of recessions, and seemingly wanted to push the price above $100. Even after Hamas’s attack on Israel in October raised the prospect of geopolitical turmoil in the region, the price of oil fell further.

Some of us highlighted the enormous number of short-sellers entering the market, together with the proliferation of trading algorithms that knowledgeable short-sellers of sufficient size could trigger. The danger of these sorts of pressures was that the market could overestimate the amount of physical oil available and overconsume.

Now we are starting to see the impact of mispricing and overconsumption. Market reports are saying that even though non-Opec countries have tried to ramp up production to offset the Opec+ cuts, they have not managed to plug the gap and supply shortfalls are now starting to appear. When Opec+ announced the cuts in the closing months of last year, oil bears dismissed them. Those bears are now being proved wrong, as the reality of supply and demand becomes too obvious to ignore.

This is leading to delayed concerns about the present geopolitical situation. Earlier this year, the United States initiated backdoor meetings in Oman with Houthi rebels over their Red Sea blockade. At the end of last week it was reported that the White House had told the Ukrainians to stop hitting Russian oil production facilities out of fear that it might raise energy prices in the run-up to the presidential election.

This all feels like it is too little too late. If the Biden administration were seriously concerned about its own electoral future, it would have ignored the short-sellers and the oil bears and focused on the fundamentals. This would have allowed it to take an “all-hands-on-deck” approach to cooling the geopolitical tensions currently putting pressure on oil supplies. Instead, the White House listened to the siren song of the short-sellers because it was easier — and now the oil price is rising as the country gets ready to go to the polls.

The same can be said of central bankers. It should have been obvious that the Red Sea blockade would eventually start to feed into inflation. But central bankers wanted to believe that inflation was falling so that they could claim victory, and as a result they too dialled into the short-seller messaging. In January, Bank of England Governor Andrew Bailey stated that although the Bank was monitoring the situation in the Red Sea for inflationary pressures, because they were not then seeing a rise in oil prices they were not willing to factor the crisis into their forecasts.

This raises the question of what economic forecasters, whether working for the Biden team or the Bank of England, actually do. They appear to think that it is only permissible to factor global shocks into inflation forecasts when the effect can already be seen in the price. But this is not forecasting in any meaningful sense: it is like a weatherman approaching you as you get drenched at a bus stop and telling you that it is currently raining.

After four years of global disruptions leading to rising prices, it is time that forecasters take these global events seriously and integrate them into their thinking. No weatherman should get paid to tell you that it is currently raining, and economists should be no different.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Jim Veenbaas
Jim Veenbaas
3 months ago

Drill, baby drill.

Hugh Bryant
Hugh Bryant
3 months ago
Reply to  Jim Veenbaas

Yes, the salaries of politicians and government employees should be explicitly linked to GDP per capita. Then they might put our interests ahead of those of the vested interests and bullying NGOs.

Mike Doyle
Mike Doyle
3 months ago
Reply to  Hugh Bryant

I’d link them to the median wage instead. If everyone benefits, they benefit; if only the rich do, they don’t.

Hugh Bryant
Hugh Bryant
3 months ago
Reply to  Mike Doyle

Even better.

John Riordan
John Riordan
3 months ago
Reply to  Mike Doyle

The problem is that this creates a disincentive for anyone to do the job unless they’re already rich and therefore don’t care if they earn nothing from the job.

Alan Melville
Alan Melville
3 months ago
Reply to  John Riordan

Not sure I follow your logic, John. Surely if the salaries of the public sector, and of elected officials in particular, were linked to a 5-year moving average of the median wage, they’d be incentivised to do a good ob for most people?

John Riordan
John Riordan
3 months ago
Reply to  Alan Melville

In the public sector generally, yes, because there are millions of them and there aren’t that many rich people. For the 650 elected representatives however, a job in which a person risked earning next to nothing in a bad year would be something the vast majority of people could not afford to take. We’d end up with a bunch of otherwise unemployable trustafarians in Parliament.

I’d go the other way on this: MP salary of ÂŁ500,000 a year but with rules on second jobs and declarable interests that would put a complete stop to lobbying and corrupt influence.

R.I. Loquitur
R.I. Loquitur
3 months ago
Reply to  Hugh Bryant

No, then the numbers would just be even more fraudulent.

Hugh Bryant
Hugh Bryant
3 months ago

To have a genuine grasp of economics you have to understand how people actually behave in the marketplace – which is why academics and civil servants who’ve never been to the coalface invariably suck at it.

R.I. Loquitur
R.I. Loquitur
3 months ago

The Fed et al seem to believe that the only thing that affects inflation is interest rates, coincidentally the only thing they control.

Steve Jolly
Steve Jolly
3 months ago
Reply to  R.I. Loquitur

When all you have is a hammer…..

Brian Doyle
Brian Doyle
3 months ago

All so simple
When Demand exceeds supply up goes price

And the opposite when supply exceeds demand down goes price
A ave 14 yr old with a good dose of common sense knows this

Alex Lekas
Alex Lekas
3 months ago

Experts. Where would we be without them.

Robert
Robert
3 months ago
Reply to  Alex Lekas

Well, we’d find it difficult to make sense of the markets and the world in general and how it all works whereas now we have experts to bring clarity as to how –
Wait a sec…
Umm, never mind.

William Brand
William Brand
3 months ago

Economists are part of the Elite class. That class are the last to feel the effects of a bad economy. They confuse the stock market with the real economy.

William Brand
William Brand
3 months ago

The official salaries of politicians have little relation to their income. Their actual income comes from bribes also known as political contributions. These go up as the economy drops giving them the false impression about prosperity.

Steve Jolly
Steve Jolly
3 months ago

Biden will just release more of the strategic oil reserves to temporarily stabilize the price here in the US, again, like he did last time the inflation level was politically inconvenient for his party before the midterms. It’s pretty low risk from a strategic standpoint. The strategic oil reserve was created back in the energy crisis of the 70’s when America was importing most of its oil supply and the military was terrified of running out during a war and/or having the economy collapse worse than it already had. A lot has changed since then. The US produces far more and imports far less, and our principal military rival, China, is far more vulnerable, importing almost all their oil, so the US can afford to use the strategic reserves to play politics or just to give American citizens an unfair advantage by essentially buying oil when the price is low and selling it to American distributors and refineries at a rate substantially below market value. In fact, this is probably not used as much as it should be. Keeping energy prices lower through simple economic tactics like this would go a long way towards building an advantage for American businesses and workers. Now that we produce enough of our own energy supply, the US could easily maintain an energy cost advantage versus almost everybody else in the world save Russia.