Cheap Oil?

With energy policy pandering the topic of the moment, I found this Foreign Policy interview with Lehman Brothers’ chief energy economist, Robert Morse, noteworthy for his suggestion that the market might already be correcting itself on the fundamentals. Morse underlines the opacity of both supply (ie. How much reserve capacity does OPEC really have?) and demand (ie. How much oil does China really need?) as a driver of the recent price surge. But with increases in Iraqi production and global inventories, and a cost-driven decline in demand, Morse sees oil back in the double digits by election day.

If what Morse says about opacity is true, what’s striking about the oil bubble, as opposed to the internet bubble, is how irrational exuberance has given way to irrational pessimism. In the nineties, no one knew the actual value of an internet startup, but no one cared. Nowadays, people hedge their bets against the unknown.

It’s a trend that isn’t necessarily limited to the markets. Reminding Americans that we’ve got nothing to be afraid of is a presidential tradition that goes back to FDR. That, as much as anything else he did, was Ronald Reagan’s most substantive accomplishment. We could use a shot of that medicine today.