The Real Cause of High Oil Prices

Nowadays the energy picture is confusing at best as the more information we are shown the murkier the picture seems to become. Mixed messages, poor reporting and a media hungry to sensationalize anything it thinks can grab a headline have led to many wondering what the true energy situation is. We hear numerous reports on how the shale revolution will transform the energy sector, why alternatives are just around the corner, why advances in oilfield extraction techniques and new finds will help to lower oil prices. Yet no sooner have we read these rosy reports than we are bombarded with negative news on the Middle East, on why alternatives will never compete, on peak oil and declining oil production.

So where do we really stand? Is our energy future one of falling prices and plentiful supply or should we prepare for declining supply and sky high prices?

To give readers a real understanding of where we are we were fortunate enough to speak with the world’s leading energy economist, Professor James Hamilton. James is a professor in the Economics Department at the University of California, San Diego. He has been a visiting scholar at the Federal Reserve Board in Washington, DC as well as many of the Federal Reserve Banks; and has also been a consultant for the National Academy of Sciences, Commodity Futures Trading Commission and the European Central Bank and has testified before the United States Congress.

You can find more of his work on his website Econbrowser

In the interview, James discusses:

• Why we shouldn’t get too excited with the shale revolution
• The “Real” cause of high oil prices
• The incredible opportunity presented by natural gas
• Why long term oil prices will creep upwards
• The geopolitical hotspots that could cause an oil price spike
• Why sanctions could cause Iran to lash out
• Why speculators and oil companies are not to blame for high oil prices.
• Changes we can expect to see under a Romney Administration
• Why Short term oil price forecasts are worthless
• Peak oil & Daniel Yergin

Interview conducted by James Stafford of Oilprice.com

Oilprice.com: Oil prices have shot up in the last month. What range do you see oil prices trading in over the next 12 months?

James Hamilton: Oil prices have always been very volatile. If you look at 12-month logarithmic changes in WTI going back to 1947, you come up with a standard deviation of 0.27. In other words, 25% moves up or down within a year are fairly common, and 50% moves or greater have also been seen on a number of occasions.

If you look at options prices at the moment, they imply the same level of uncertainty looking forward. For example, somebody today is willing to pay $2.90/barrel for a NYMEX option to buy oil in September 2013 at $120/barrel, consistent with a standard deviation of annual log changes of 0.26. The market is saying that prices that high or higher are not that remote a possibility.
Full article at: >The Real Reason Behind Oil Price Rises – An Interview with James Hamilton