Question about current oil prices?

How much of today's current price already accounts for all of the things that people fear (i.e. political turmoil and increasing demand/slowing growth rates in production)?





Is the potential for these things already built into the price, a la ';buy on rumor sell on news'; to the point where if these things happen or worsen, prices shouldn't react too strongly?





I appreciate your opinions.Question about current oil prices?
If the fear premium wasn't high, any number of events that have happened this year (the militant attack on the largest oil processing facility in Saudi Arabia, or the breakout of significant hostilities in the Mideast involving a client organization of Iran, or the recent shut-in of a large chunk of the Prudhoe production), should each have had a larger impact on the pricing along the futures curve.Question about current oil prices?
How much of today's current price already accounts for all of the things that people fear (i.e. political turmoil and increasing demand/slowing growth rates in production)? I think about 30%





Is the potential for these things already built into the price, a la ';buy on rumor sell on news'; to the point where if these things happen or worsen, prices shouldn't react too strongly? I think new fears will make it move more, people make fears...
That is the idea of efficient market theory.


That is also part of the reason that though the price of a barrel of oil has nearly tripled in the last few years, the price at the pump has not quite.





They are tied, but not perfectly.
I don't think the fears of the general populace has much to do with the price of oil. like most commodities, oil is valued by supply and demand. the supply is more or less constant (though OPEC could increase the supply if it wanted to). the demand has been growing at a significant rate, primarily as a function of the growth of developing nations, especially china and India, but in the US and Europe, too. more big cars, more big houses, more travel by more people.





but as the price rises, alternatives become available. there are 'tar sands' in canada which contain billions of barrels of oil. at $40/bbl, it cost more to extract the oil from the sand than it is worth, but at $80/bbl, it becomes economically feasible. As the price goes higher, the incentive to use ethanol becomes greater, as does the use of coal rather than gas or oil to fuel electric plants (same arguement for nuclear plants). At $80/bbl it is feasible to convert coal to fuel oil and gasoline and still make a profit, especially if hydroelectric power is available near the coal. the chinese have pioneered development of this alternative.





news items may have a short-term impact, but don't much affect the underlying economics of the problem
It's hard to be sure exactly how much of the price of oil is a 'fear' premium. It is fairly substantial though you can rest assured that if stuff continues to go wrong the price of oil will continue to go up. I don't think we're at anything like a cieling on the price of gas. Full disclosure I do own stock in a company that owns the rights to an Alaskan oil field so I have an interest in seeing oil go higher. Might color my views.
It is based on estimates of what the market will be like in 3-6 months, or even out to a year. The reason our prices spike is that when something happens, they are needing to charge the user more so that they can afford to buy the oil when the prices are higher, as a result of whatever happened (political turmoil, supply interruptions, etc).
Some substantial amount of price increase is connected to the world unrest fears of the people in the oil and investing business. So yes, modest calamities are already priced in.





Another interesting theory is the one put forward by Alan Greenspan (congressional testimony) several months ago. He said that because investors realize that there is rising demand and stagnant supply, they are investing in energy/oil derivatives. Investors then actually own oil in storage. This places a large fraction of the world's oil storage capacity off-limits to the oil industry. This makes the buffer between oil supply and refinery demand much smaller %26amp; drives up costs in the oil/gas industry.