[Jack]

From the updated (2005) Hirsch report:

$this->bbcode_second_pass_quote('', 'A')s world oil peaking is approached and demand for conventional oil begins to exceed supply, oil prices will rise steeply. As discussed in Chapter IV, related price increases are almost certain to have negative impacts on the U.S. and world economies. Another likely signal is substantially increased oil price volatility.

Oil prices have traditionally been volatile. Causes include political events, weather, labor strikes, infrastructure problems, and fears of terrorism.114 In an era where supply was adequate to meet demand and where there was excess production capacity in OPEC, those effects were relatively short-lived. However, as world oil peaking is approached, excess production capacity by definition will disappear, so that even minor supply disruptions will cause increased price volatility as traders, speculators, and other market participants react to supply/demand events. Simultaneously, oil storage inventories are likely to decrease, further eroding security of supply, aggravating price volatility, and further stimulating speculation.115

While it is recognized that high oil prices will have adverse effects, the effects of increased price volatility may not be sufficiently appreciated. Higher oil price volatility can lead to reduction in investment in other parts of the economy, leading in turn to a long-term reduction in supply of various goods, higher prices, and further reduced macroeconomic activity. Increasing volatility has the potential to increase both economic disruption and transaction costs for both consumers and producers, adding to inflation and reducing economic growth rates.116

The most relevant experience was during the 1970s and early 1980s, when oil prices increased roughly six-fold and oil price volatility was aggravated. Those reactions have often been dismissed as a “panic response,” but that experience may nevertheless be a good indicator of the oil price volatility to be expected when demand exceeds supply after oil peaking.117

The factors that cause oil price escalation and volatility could be further exacerbated by terrorism. For example, in the summer of 2004, it was estimated that the threat of terrorism had added a premium of 25 - 33 percent to the price of a barrel of oil.118 As world oil peaking is approached, it is not difficult to imagine that the terrorism premium could increase even more.

In conclusion, oil peaking will not only lead to higher oil prices but also to increased oil price volatility. In the process, oil could become the price setter in the broader energy market, in which case other energy prices could well become increasingly volatile and unpredictable.119

[rwwff]

Could be that part of the earlier volatility was caused by conditions where intervals of overproduction created some excess supply that then caused panicky distributors to reduce wholesale prices quickly in order to move their non-storable inventory. So you have both low and high excursions in price.

In today's market, where supply appears to be running at max capacity, any dips in demand that create excess are rapidly scooped up and held with confidence in the knowledge that any short term excess will rapidly dissipate. This type of condition I think only lends itself to fluctuations on the tightening side.

Just a hunch.

With China filling strategic reserves, I think it safe to conclude that any short term dips in price will be pounced on hard for several years to come. So no real softness in price.

There are some speculators on the board who probably have had a more direct view of the circumstances.... I'd be interested too in knowing whether my hunch is close, or whether I've missed the mark...