Does queueing theory explain oil’s wild price swings?

To paraphrase Mark Twain, rumors of the oil bull market’s demise have been greatly exaggerated. With crude oil down a mere $30 from its recent peak, many economists and financial analysts are proclaiming the end of the oil bull market. They seem to have forgotten that not too long ago the entire distance from zero to the oil price was only $30. While no one can predict the future of oil prices with certainty, there are explanations for the recent price decline consistent with an ongoing bull market.

First, let’s summarize the arguments for the bears. The proximate causes of oil’s pullback are said to be a slowing world economy, demand destruction and new supply. Certainly, there is some evidence of a slowing economy, and this very well might reduce demand for oil. Then, there is demand destruction. High prices force some users to cut back on consumption, and this also may have happened. Finally, there is new supply. Large finds now going into production are believed to be putting downward pressure on the price.


Trouble is, all of these explanations are as speculative as the oil market itself these days. Not until many months have passed will it be possible to ascertain whether and how much any of these factors are acting on the price today.

For those who are inclined to the view that the world is approaching peak oil production and therefore restricted supply is the key factor in soaring oil prices, Princeton geologist Kenneth Deffeyes offers a compelling explanation for wild price swings.

Energy Bulletin