Markets October 2005

Hundred-Dollar Oil

Where do you think oil prices will be next year? Go ahead, pick a number—any number—and you can probably find an expert somewhere who agrees with you. Andy Xie, the chief Asian economist for Morgan Stanley, says oil prices are about to collapse—recent prices of about $60 a barrel are far too high to last. The oil analyst Matthew Simmons says hogwash—we'll soon be paying $100 a barrel. Other pundits have staked out much of the wide real estate between those predictions.

Talk is cheap. But through two types of contracts—futures and options—traders on the New York Mercantile Exchange do more than talk: they bet daily on whether (and how much) oil's price will rise or fall by certain dates. By putting the information from options and futures together, one can come up with the probabilities that the market is assigning to oil's hitting any given price in June of next year.

So what does the smart money—or at least the money—say? The probabilities appear below. They indicate that right now the future price of oil is virtually impossible to predict, even for experts. That's not unusual: oil prices have often darted up and down unexpectedly, and a variety of factors—including the political instability of the Middle East and the uncertain future of Chinese oil demand—are making prices especially volatile today. Of course, individual investors can take or leave risky bets on future oil prices. The U.S. economy, on the other hand, has no choice but to continue playing a very high-stakes game.

Price in June
of 2006
Probability
Less than $30 2%
$30-$40 10%
$40-$50 19%
$50-$60 21%
$60-$70 17%
$70-$80 12%
$80-$90 8%
$90-$100 5%
Above $100 6%
James Hamilton is a professor of economics at the University of California at San Diego. He writes on current economic conditions at www.econbrowser.com.
Presented by

The Blacksmith: A Short Film About Art Forged From Metal

"I'm exploiting the maximum of what you can ask a piece of metal to do."

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

Video

An Ingenious 360-Degree Time-Lapse

Watch the world become a cartoonishly small playground

Video

The Benefits of Living Alone on a Mountain

"You really have to love solitary time by yourself."

Video

The Rise of the Cat Tattoo

How a Brooklyn tattoo artist popularized the "cattoo"

More in Business

More back issues, Sept 1995 to present.

Just In