October 11, 2006

IT'S MOSTLY RISK PREMIUM:

Really, Really Cheap Oil: Gasoline for $2? Michael Lynch says those good old days are just around the corner. (Christopher Helman, 10/11/06, Forbes.com)

Don't sell that SUV just yet. Oil, at a recent $66.50 a barrel, will fall to $45 by mid-2007 and could dip briefly into the 20s in 2008. Sometime next year you are going to see a $1.95 price on a gas pump.

So says Michael C. Lynch, 51, president of Strategic Energy & Economic Research in Amherst, Mass. He swears he hasn't been inhaling fumes. His reasoning: New supply, coming online from all corners of the world, is more than ample to satisfy growth in demand and sufficient even to withstand an embargo against Iran, which produces 3.75 million barrels of oil a day. Lynch argues that the threat of disruptions--nuclear brinkmanship, war, terrorism, hurricanes, pipeline corrosion--has larded oil prices with a $20-a-barrel risk premium. As these perils recede, oil prices will fall.


It'll be under $2 nationally a lot sooner than that.

Posted by Orrin Judd at October 11, 2006 8:10 AM
Comments

Irrational risk premium.

Posted by: Pepys at October 11, 2006 1:25 PM

All risk premiums are irrational--that's why everyone tries selling you insurance.

Posted by: oj at October 11, 2006 2:21 PM

It's under $2 _now_ in Manassas, VA; in fact, there seems to be a price war going on among two Exxons, a Shell, and a Sheetz located within a mile of each other on Centreville Road (Route 28). They're all in the $1.94 - to $1.97 range; Shell is out in front by a nose right now at $1.94. Sheetz has the full-service food counter, though, which might affect the contest. Stay tuned.

Posted by: Joe at October 12, 2006 5:15 AM
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