Gas prices may be lower now than when they were nearly $4 a gallon last summer, but that does not mean the energy crisis is anywhere near over, Boston University geography and environment Director Robert Kaufmann said.
‘How does the system get back into whack?’ Kaufmann asked an audience of 20 in the College of Arts and Sciences Monday. ‘What exactly is going on here?’
Kaufmann predicted last year that crude oil would be priced at roughly $65 a barrel. While correct now,’ the market first went through a dramatic peak in prices in 2007 that he said caught him by surprise.
That peak, also known as a ‘speculative bubble,’ arose because people bet on the future scarcity of oil and rather than the actual demand at the time. The big question is whether those changes were due to variations in market fundamentals, like refinery capacity and the Organization of Petroleum Exporting Countries capacity utilization, or just speculation in the futures market.
Econometric models have reliably predicted the steady increase in prices but, after 2007, the model and real-world occurrences diverged dramatically, Kaufmann said.
‘Either the model stinks,’ Kaufmann said, ‘or, a model based on market fundamentals is unrelated [to the real world], because speculation moves the market past fundamentals.’
Speculation is not solely responsible for the inexplicable peak in the 2007 oil prices, however. Since the world’s oil prices are co-integrated and move together, any disturbances to supply or demand in any one area will affect prices worldwide, Kauffman said.
To illustrate this co-integration, Kaufmann explained the breakdown of a reliable econometric model after 2004 on two events, Hurricane Ivan and the sustained increase in OPEC’s quotas.
Hurricane Ivan knocked out about 5 to 10 percent of total U.S. production of oil along the Gulf Coast in 2004, dramatically affecting the supply of oil and increasing the price, while OPEC quotas ‘ultimately drove the increase in oil prices,’ Kaufmann said.
‘In 2004 non-OPEC countries peaked in production, leaving OPEC to increase production capacity,’ he said.
With only a finite capacity, OPEC cost of production rose, leading prices to rise as well, he said. However, it was the economic downturn that the speculative bubble burst this fall.
‘This situation poses a challenge to [President-elect Barack] Obama,’ Kaufmann said. ‘With prices down, to the American public, the energy crisis is fixed.’
BU Energy Club hosted the lecture to educate students about energy issues.
‘There are a lot of options and facets to the energy field,’ Vice President Sarah Busche, a CAS graduate student, said. ‘Kaufmann is doing interesting work on oil prices. He’s a leader in the field.’
The move toward sustainability initiatives hangs on the oil crisis as well, Busche said.
‘Oil prices are important to determine the switch to alternative energies,’ she said.
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