Watching Oil

The Economist notes some gathering distress over the price of oil. But Greenspan, in a speech last Friday, presented another incarnation of his seemingly boundless optimism. Some highlights from his speech:

While there are concerns of seeming inadequate levels of investment to meet expected rising world demand for oil over coming decades, technology, given a more supportive environment, is likely to ensure the needed supplies, at least for a very long while.

Translation: don’t worry, we’re not going to run out of oil any time soon.

[L]ong-term price tranquility has faded dramatically over the past four years. Prices for delivery in 2010 of light, low-sulphur crude rose to more than $35 per barrel when spot prices touched near $49 per barrel in late August. Rising geopolitical concerns about insecure reserves and the lack of investment to exploit them appear to be the key sources of upward pressure on distant future prices. However, the most recent runup in spot prices to nearly $55 per barrel, attributed largely to the destructive effects of Hurricane Ivan, left the price for delivery in 2010 barely above its August high. This suggests that part of the recent rise in spot prices is expected to wash out over the longer run.

Translation: the main reason for the spike in oil prices right now is Hurricane Ivan, so we’ll see prices fall substantially again soon.

Today, despite its recent surge, the average price of crude oil in real terms is still only three-fifths of the price peak of February 1981. Moreover, the impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s. So far this year, the rise in the value of imported oil–essentially a tax on U.S. residents–has amounted to about 3/4 percent of GDP. The effects were far larger in the crises of the 1970s.

Translation: don’t worry. Even though the US has essentially paid the equivalent of an $85 billion tax increase due to higher oil prices this year, things aren’t as bad as they were during the 1970s.

As an aside, I wonder how Greenspan would have reacted to a proposal to raise income taxes by $85 billion this year? Would he have dismissed its economic effects just as casually?

Finally, for those who like keeping track, here’s the latest update in oil prices since the start of 2004.