The oil price paradox

As the price of crude surges again to new highs, even the CEO of Exxon says he can't figure out what's going on

Published September 12, 2007 3:27PM (EDT)

Rex Tillerson, the CEO of Exxon Mobil, is confused. At a business roundtable in Calgary, Canada, last Friday, he said he just doesn't understand why the price of oil is so high.

"I cannot explain why we have $70 oil. The fundamentals behind supply and demand do not support $70 oil. The fundamentals support something much less... There's something else going on there that I don't get."

By midday Wednesday, crude oil futures hit a new "intraday" high of over $79 a barrel, (albeit not historically adjusted for inflation) so one imagines Tillerson is even more befuddled this week.

Peak oilers think they know why the price of oil keeps going up, up, up. Because we're running out. Every time new crude oil inventory statistics reveal surprisingly large draw downs, they feel freshly ratified. Others blame speculators, who keep prices propped up by continually laying bets that prices will rise -- a terrifically powerful self-fulfilling prophecy that works until it doesn't. Still others say all you need to do is look at China, which registered a phenomenal GDP growth rate of 11.9 percent in the second quarter of 2007, leading the World Bank to raise its prediction for Chinese economic growth in 2008 from 10.4 percent to 11.3 percent. When a country whose economy is already the fourth largest in the world continues to grow at a rate of 11 percent a year, it is almost inconceivable to grasp how fast its appetite for everything is surging.

Everybody's got a different explanation. But here's the one that's tickling my irony meter right now. On Tuesday some analysts explained the rise in oil prices by attributing it to investors who believed that the all-but-inevitable Federal Funds rate cut expected next week will goose the American economy, and thus ensure a continued robust demand for energy. But on Wednesday morning, some analysts were theorizing that high oil prices were bound to exert a dampening effect on economic growth.

Which in turn, would raise the likelihood of more rate cuts, which would increase economic growth, which would lead to more consumption of oil, which would push prices up even further, which would slow economic growth, which would lead to more rate cuts, which would...

How the World Works is feeling a little sympathy with Rex Tillerson this morning. We too, are easily confused.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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China Globalization How The World Works Peak Oil U.s. Economy