Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Thursday, October 26, 2006

Oil is Rather Expensive

Brad Setser is skeptical:

RGE - Not so big worries for big oil -- even at $60 a barrel, oil is rather expensive: I would be the first to concede that $60 isn't $80. Or even $70, the average price for oil (at least the good sweet light easy to refine stuff) in the second and third quarter. US consumers - at least those in those parts of the income distribution that haven't seen big rises in their nominal-let-alone real wages -- were starting to feel really squeezed with oil at $80. Now, they can afford to fill up their tank and still buy at least a few things at the local Walmart.

But the premise behind Chip Cummins' A2 Wall Street Journal article still seemed a bit off. If you invested in a lot of oil fields that were expected to be profitable if oil averaged $20 a barrel, you will certainly make more money if oil is at $80 -- or even $70 -- than if oil is at $60. But I am pretty sure that you will be making money even if oil is hovering around $60 a barrel.

Equity markets are not my thing. But given the change in the trajectory of oil prices, I cannot imagine that anyone holding an oil companies' stock would expect oil companies to be able to sustain the kind of revenue growth they enjoyed when oil was steadily climbing up now that oil is falling. So, unlike Cummins, I would hardly define a slowdown in oil profits as a "big problem":

"With crude prices falling and oil-field costs on the rise, major oil companies have a big problem: sustaining their phenomenal profit growth."

Oil companies should make less money in q4 than in q3. So what? They will still be making a ton of money.... [I]f someone had told me two years ago that oil at $60 would be widely considered a positive for the US economy (and a negative for oil companies), I wouldn't have believed them.

Then again, if someone had told me two years ago that China could double its reserves, only partially sterilize the resulting reserve increase and still have (CPI) inflation of less than 2%, I wouldn't have believed them either...

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