Why we’re keeping an eye on oil pricing

|

One of the mysteries of the present growth cycle is how rents have continued to grow at a rate exceeding wages.

One partial / possible explanation is that, in contrast to previous growth cycles, the advent of US-based fracking has kept energy prices surprisingly low, leaving more cash in the pockets of potential renters.

So, I watch oil pricing with interest.

And today, the Wall Street Journal reports that oil prices are, for the first time in a long time, touching $60 / barrel, as a result of:

  1. Unanticipated, strong demand fueled (haha!) by global growth; and
  2. Production constraints put in place recently by OPEC

Now, in all likelihood, this price spike with be temporary, because:

  1. There are thousands of oil wells sitting idle because their owners can’t make money at $40-50 / barrel (where prices have been for a long time), and those wells will come back online if prices remain around $60 for long enough; and
  2. Rising prices are going to tempt OPEC to pump more, endangering its production constraints

So, I expect oil will come back down into the $40-50 / barrel range, helping to prolong the current cycle.

But we’re watching closely.

Share