Search This Blog

Wednesday, March 08, 2006

Kudlow Konfused?

Larry Kudlow (of Kudlow & Company fame), in talking about recent news regarding the Iran nuclear threat and the world's response to it, makes the following statement on his blog:
"As for the market’s reaction to all this stuff, you really don’t see it reflected yet in oil prices..."
I find this statement mind boggling coming from an economist like Mr. Kudlow, especially since his commentary is usually so logical and non-controversial (from a mainstream economics perspective). I have no idea why he thinks that this one time the market has chosen to ignore important information (weighted by the probability of those events happening). Especially since it looks to me like the price of oil already has a substantial probability of a significant disruption already priced in. For example, today, according to Reuters:
"U.S. commercial crude supplies shot to the highest level in nearly seven years last week on sluggish refinery use and high imports, the government said on Wednesday. [...]

In May 1999, the last time supplies were as high, oil futures were less than $17 a barrel."
In other words, the natural price level given current supply without the threat of impending disruptions is potentially far below the current price levels (probably not $17, but $35 per barrel is certainly possible). The Iran thing is nothing new and the market had previously incorporated this information in the price.

No comments: