Oil Price Nonsense

The NYT today has an article titled “Swings in Oil Price Hobble Forecasting” and the meaning given to this statement by reading the article is basically “uncertainty generates uncertainty”…thanks NYT…

But what is even crazier, is that what they are attributing to uncertainty can be explained, and most of the examples they cite ARE actually explained IN THE SAME ARTICLE!

From the article:

“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”

But later on, the article says:

Many factors that pushed oil prices up last year have returned. Supply fears are creeping back into the market, with a new round of violence in Nigeria’s oil-rich Niger Delta crimping production. And there are increasing fears that the political instability in Iran could spill over onto the oil market, potentially hampering the country’s exports.

The OPEC cartel has also been remarkably successful in reining in production in recent months to keep prices from falling. Even as prices recovered, members of the Organization of the Petroleum Exporting Countries have been unwilling to open their taps.

Those sound like pretty rational explanations to me…but hey, I guess the CFO at Southwest doesn’t think so, and they are a highly paid private sector employee clearly well worth their compensation package. At least she isn’t working at a bank…

Then there is this explanation:

But unlike last year, when the economy was still not in recession and demand for commodities was strong, the world today is mired in its worst slump in over half a century.

OH! So when the economy is not in recession prices are higher than when it is in recession! SHOCKING! And when that recession is being billed as potentially as bad, if not worse than the GREAT DEPRESSION, prices slide even more. And when it is now being billed as the worst being over, oil prices are climbing. Once again, it seems that there is a pretty rational explanation for the shifts in oil prices I’ve been seeing.

Finally:

Top officials said that OPEC’s goal was to achieve $75 a barrel oil by the end of the year, a target that has been endorsed by Saudi Arabia, the group’s kingpin.

So ok. If I had to forecast where oil prices will be by the end of the year, I’d bet around $75.

Plus a random bit of misinformation:

The automakers General Motors and Chrysler have been forced into bankruptcy as customers shun their gas guzzlers.

Which isn’t really true. It might be part of the explanation, but it certainly isn’t all of it. The credit crunch didn’t cause high oil prices, or vice versa.

So I guess in the end, my real problem is with the CFO of Southwest, not the NYT.

The article closes with probably the best line in it, from the just retired CEO of Royal Dutch Shell:

“Oil has never been very stable,” Mr. van der Veer said. “If you look at history, you have to expect more volatility.”

I’ll close with a bit of my own advice. Don’t invest in Southwest until they replace their CFO.