Paper No. 6
Presentation Time: 3:10 PM


HANSEN, Jim, Ravenna Capital Management, 19722 41st Ave NE, Lake Forest Park, WA 98155-1609,

In 1998 The Economist famously predicted the price of oil was headed to $5 per barrel from its price at that time of $10. Ten years later investment banks were predicting that oil would soon reach $200 per barrel. Neither of these proved right as the realities of geology and markets proved more powerful than the crystal ball used for forecasting.

The International Energy Agency has stated that ninety-seven percent of global transportation fuel is provided by oil today. This level of dependency illustrates the critical sensitivity of the global economy to the price of oil.

Since fossil fuels provide over three quarters of global primary energy today simply shifting the transportation energy demand from one primary fossil fuel to another may not provide the solution that has been frequently reported. Shifting significant transport demand from oil to natural gas would put the lower value added consumers currently depending on natural gas in direct competition with the higher value added transport sector.

Reversion to the mean of oil prices is one of the fundamental truths that have prevailed in energy markets for decades. However current trends appear to be breaking down that historic path following the 2008 financial crisis and the apparent plateau in crude oil production since 2005.

A comparison of the supply and demand shifts that occurred following the price spikes the 1970's to what has taken place since the 2008 price spike provides some insight into what is happening today. Unlike the early 1980's when the inflation adjusted price of gasoline fell by 46% between 1981 and 1986 today's price is above pre-financial crisis levels near record highs in real terms.

The interaction of geologic realities, market forces, politics and more recently concerns over climate change appear to have impacted the supply and price of energy around the globe in new ways. Understanding how these forces interact and feedback is important in understanding the forecasting models that depend on them.

There is far more to this story than a simple bell curve.