Conventional Wisdom on Oil

Speculation cannot affect prices very much.

Fear about future troubles in oil producing countries add to the price of oil.

How can these two ideas be reconciled?

1 comment so far

  1. Phil on

    These two ideas can’t be reconciled; the first idea is false. One only has to think of the Dot-Com/NASDAQ bubble, or the US housing bubble, and the role that speculation has on asset and commodity prices. However, despite that many are troubled over the high price of oil (and gas), it totally misses the true price of oil, once it’s externalities are factored into the price.

    The International Center for Technology Assessment has calculated that if the externalities of oil were factored into the price, then a gallon of gas would cost between $5.60 (low estimate) and $15.14 (high estimate) (1997 dollars), based upon a gallon costing $1. In 2007 dollars, a gallon should cost approximately $7.23 to $19.55. The externalities are grouped into five categories:

    – Tax subsidies
    – Government subsidies
    – Protection costs
    – Health, environmental and social costs
    – Other costs

    ICTA. (1997). “The Real Price of Gasoline: An analysis of the hidden external costs consumers pay to fuel their automobiles”.

    The National Defense Council Foundation found that the price of gas per gallon was approximately $10.86.

    NDCF. (2006). “Testimony of Milton R. Copulos, President, National Defense Council Foundation before the Senate Foreign Relations Committee”. March 30, 2006.

    NDCF. (2003). “America’s Achilles Heel. The Hidden Costs of Imported Oil.” October, Washington, D.C.


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