Yesterday I wrote a responseÂ to an opinion article in the Wall Street Journal regarding $100 oil.Â Later in the day, one of our readers, AaronH, made some good points in a comment.Â Here is an excerpt of what Aaron pointed out:
“I have to disagree with the above strongly. Price here is not due to speculation. In commodities markets, supply and demand exist in relative terms instead of linear. In other words, consider rates of change, not absolute quantities in linear terms. ”
Â Clearly Aaron is referring to the fact that commodities markets take into account the rate of production compared to the rate of consumption.Â This is true and is often the leading cause of speculation.Â As different events conspire in the market for oil the price will fluctuate as investors speculate about whether production can keep up with demand – as a side note, this is in line with basic micro-economic concepts of supply and demand.Â
However, as the post from yesterday explains, on a long-term basis the price of oil is unlikely to remain high (though it may rise yet further in the short-term due to speculation and supply issues) since we will likely never run out.Â Eventually the demand for oil will decrease leading to a decrease in price.Â I suspect this decrease in demand will come before the tipping point referred to as “Peak Oil” arrives.Â As a result, it seems that the truly long term investor should not be advised to go after the oil market due to the high amount of speculation involved and the likelihood of the price dropping in the future.