Oil Prices and the Windfall Arrogance Tax
Arnold Kling writes:
If the oil company executives want to put money on their “working assumption of $15-$30 per barrel,” then they should go short in the futures market. But if their goal is to maximize shareholder wealth, then they should make long-term investment planning decisions based on the futures price of about $60 a barrel. What the oil company executives are doing is equivalent to a mortgage banker making a home loan for 5 percent based on a “working assumption” that rates are going to eventually head down to that level. I don’t believe in a “windfall profits” tax for oil. But a “willful arrogance” tax might be in order.
It seems he’s been carefully reading the energy chapter of the Economic Report of the President. James Hamilton examines real oil prices since 1970 and writes:
The conclusion I draw from such calculations is that a random walk seems to be quite a good approximation to the dynamics of real oil prices
It does turn out that there is a small chance that oil prices will fall below $15 a barrel by 2010, but there is small chance that they will rise above $230 a barrel by the same random walk model.