David Henderson makes a bet

I offered him a $100 bet, at even odds, that he accepted: in 2018, the inflation-adjusted price of oil will be lower than an $80 average for the year. He’s saying it will be higher. I tried to tilt it a little in his favor by naming the benchmark oil–West Texas Intermediate–which is sweet (low-sulfur) and, therefore, higher-priced. I hadn’t realized how big a premium when I made the offer. But, oh well, a deal is a deal.

More unfortunate for David is that the world price of oil is right now better measured by the Brent Crude price. It usually trades in a pretty tight band with WTI but because of infrastructure issues in the US the markets have been severed.

FRED Graph

This state of affairs should be fixed in part by Keystone XL which should send the WTI price up to where Brent is now.

Nonetheless I would be inclined to bet with David as the marginal cost of extraction is well below $80 and this is a classic adjustment cost of investment issue.

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