Oil heads toward its "user value"

I think the writers of the report confound short-term with long-term. Indeed, we have seen that short-term, demand for oil was very inelastic. Since all existing capicity is used for pumping up oil, this means that the same volume of oil is produced, but at higher prices (since demand continued to rise). This means that prices can go up untill they reach the point demand will flatten out, at what they call 'user value'.

However, long term there will be more entrants into the oil market, there will be other energy sources, there will be conservation. Hence, we will no longer need all existing pumping capacity, and the classic marginal cost will play again.

I think it says that oil will be priced at its value to our lives, rather than the cost plus profit of the participants in the production chain. It's hard to believe, primarily because that value would be different for every user (or more likely, every economy). To each according to their ability to pay?

"Such a new price regime, pricing at the "User Value", also implies that the oil price will not necessarily invite new supply into the market, since income requirements of producing countries (especially OPEC member states and Russia) will be easily met through price rather than volume."

Wrong. The price will eventually bring other sources of energy supply into the market. This may take a while but it is already starting to happen.

I've thought of this as an episode of price discovery. I think the pace was fueled by speculation, but perhaps only the pace. Well known changes in supply (tapping out "easy" oil) and demand (insatiable emerging economies) provided the fundamental drivers.

So sure, is my price discovery their user value?

Yes, your price discovery is their user value.

A method of determining the price for a specific commodity or security through basic supply and demand factors related to the market.

In most cases, I would tend to believe that these values are the same. The User Value will be constrained to some median value and more often than not that should correspond to what most people can pay for the last barrel of oil.

Clear as mud? I thought so.

"But the economists haven't been particularly good at forecasting oil prices lately."

I comment on this here:

http://economics.about.com/b/2008/07/30/the-user-value-of-oil.htm

The short answer - if the efficient market hypothesis even roughly holds, then fluctuations in oil prices should inherently be unknowable.

My question is - what on earth are economists doing in predicting oil prices? Why don't they know better?