As we wrap up 2024, pundits are eager to share their insights and predictions for the year ahead. One such expert is Mr. Question Man, known for his sharp, candid commentary. We sat down with him to get his take on the direction of oil prices, global climate policy, and the so-called energy crisis.
Q: What’s your outlook on oil prices, and does it really matter?
A: You may recall economist John Kenneth Galbraith’s famous remark that economists’ projections only serve to make astrologers look good. But I’ll give it a shot. Oil prices will continue to fluctuate, as they always have. Over the past 50 years, oil prices have generally followed a “reversion to the mean” pattern. In other words, they tend to return to an average level after significant fluctuations. This matters, especially since it’s been the pattern for decades.
However, much of the rise in oil prices over time can be attributed to inflation. When adjusted for inflation (using the consumer price index), the real price of oil has remained fairly stable over the past 50 years. From 1974 to 1999, oil prices rose 3.4% annually, while inflation averaged 4.7%. From 1999 to 2024, oil prices increased by 4.0% annually, while inflation was lower at 2.6%. Over the entire period from 1974 to 2024, both oil prices and inflation grew at an average rate of 3.7%. So, if you’re betting on long-term oil price trends, you might as well base your expectations on inflation rates.
Econometrics can certainly provide insight, but it’s often just fancy guesswork. As a grad school professor once quipped, “I can predict just as accurately using a ruler.”
Q: So, what’s the key takeaway here?
A: Short-term fluctuations in oil prices are driven by a variety of unpredictable factors: economic activity, natural disasters, wars, supply cuts by OPEC, and so on. For example, both the Chinese and European economies are showing signs of weakness, and depending on the U.S. presidential administration, the country could ramp up oil production if OPEC cuts supply too drastically. But predicting short-term price movements is difficult.
Oil companies should not base long-term investment decisions on these short-term swings. Proper investments in the oil industry tend to pay off over decades. What we know for certain is that population growth is slowing, and significant investment is being made into electric and hybrid vehicles, which could reduce demand for oil, especially in transportation. Beyond that, much of the analysis in econometric models is speculative. The long-term trend? I’d bet on $70 a barrel, adjusted for inflation. That’s a simple, pragmatic approach.
Q: So, you think using a “ruler” to project oil prices long-term is the best approach?
A: Why not? If you have a better idea, I’m all ears.
Q: What about the impact of the Trump administration on global climate policy?
A: The Trump administration could pull out of international agreements and refuse to allocate funds to help developing countries impacted by climate change. But the U.S. isn’t the global powerhouse it once was. If American industry focuses on outdated technologies, like coal-fired power plants or internal combustion engines, this would create challenges. U.S. companies would be limited to a shrinking market, which means they’d lose economies of scale. The world is moving toward modern technologies. So, investing in companies that reject these advances might not be the best strategy.
Q: Lastly, let’s talk about the so-called “energy crisis.”
A: What crisis are you referring to?
Q: The one about states like Utah needing more coal for electricity to meet the growing demand from data centers and AI. Governors are worried there won’t be enough power.
A: This “crisis” is overblown. The five big companies likely to dominate AI and data centers—companies with combined sales of $1.8 trillion and profits of $400 billion—could easily afford to build their own private, low-carbon electric networks if they wanted. This is essentially a manufactured crisis. These companies are concerned about rising electricity demand, but rather than paying for it themselves, they want utility ratepayers to foot the bill.
Q: Thank you, Mr. Question Man, for your thoughtful insights.
A: Well, I hope you’re not just flattering me to get me on OilPrice rather than Fox News!
Conclusion:
Mr. Question Man’s take on oil prices and global issues is refreshingly candid. He suggests that long-term projections for oil prices are best based on inflation, and that investments in oil should be made with a long-term horizon. Meanwhile, the fears over an energy crisis seem overblown, especially when the companies driving AI and data centers could easily fund their own solutions. As for the impact of the Trump administration on climate policy, Mr. Question Man warns that focusing on outdated technologies could limit U.S. companies’ growth potential in a rapidly changing global market.
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