Archive for May, 2008

The Hog Cycle

Sunday, May 11th, 2008

As I was listening to the speakers at the EIA conference back in March, particularly those speaking about the peak oil issue, my thoughts turned to the old hog cycle theory of agricultural economics. Since I studied this 30-some years ago, I turned to the web to refresh my memory after letting it gel until now.  As luck would have it, the same thing was on Paul Krugman’s mind back in 2001, before the recent run-up in prices (http://query.nytimes.com/gst/fullpage.html?res=9E0CE7D6123BF93BA25752C1A9679C8B63&sec=&spon=&pagewanted=1). I’ll leave it to you to evaluate his argument and decide if he was prescient.

It appears to me that the run-up in prices and the instability of producing countries almost mirrors the situation we had in the 1970’s.  Both times we have been or were bogged down in a foreign war quagmire.  The last time there was an OPEC oil embargo and price controls.  Now we have a Strategic Petroleum Reserve to get us through short term shortages and prices set by markets.

I would not bet on if, when and how oil prices crash again and we have a glut of product on the market.  But the history of the petroleum markets since 1859, when Col. Drake sunk the first producing well, is that it is a boom and bust industry.  I. e., the economics of the hog cycle broadly define other commodities markets, including fossil fuels.  So sooner or later…