- February 9, 2009
- Posted by: admin
- Categories: Blog, World Economics
During the past 8 months, crude oil has declined form 147.00 USD a barrel to 36.00 USD a barrel. International markets have felt the ripple effect of this diving commodity, the world over. From third world countries to NATO powers, from Hedge funds to equity markets, none have been left unpunished.
Lets talk about why this happened, and what can be done to prevent it from happening again. Is it really a case of a supply demand gap, or has this been the most severe economic manipulation ever, under the hood of war games and regional economic warfare.
Most people blame the bush administration for this aftermath, however few realize that the middle east and its oil production also has a big role to play in this dilemma. Furthermore, the severe downturn of oil prices can only be caused by repeated shorting at the commodity level.
Please state your thoughts on who you feel is responsible. Also, state solutions with rationale, on how this can be prevented from happening within any other commodity or international market.
Consider that many oil exporting countries need oil dollars to fund government coffers. With oil prices this low, OPECs first instinct is to prop up the price by reducing production. The problem is that countries like Venezuela are enticed to cheat precisely because it now takes more than 3X the oil sales to create the same revenue experienced during last summer.
The short term fiscal needs of countries that are dependent on oil dollars trumphs any long term rational goal of lowering production to keep prices high. My expectation is that the longer the price remains low the risk of shifting to a new supply curve increases and eventually will force prices to even lower levels.
Near term I think prices below $30 are more likely than $80.
The oil price is just following the economic impact of regulatory failures in restraining asset values (bubbles). Primary solution: Better financial regulation (in my opinion)
Even when economies operate in an orderly manner, all commodities are subject to price manipulation by suppliers (especially where a monopoly or oligopoly exists), as they are by speculators and traders.
Oil prices were driven into a speculative bubble based on false scare tactics that oil was in short supply, and that huge demand by the fast-growing Chinese economy would cause further shortages. Some idiots even predicted that oil would rise above $200/barrel as it soared through $140.
Such absurd predictions ignored the realities of Chinese demand (which is much lower, and in any event China has an abundance of untapped oil and natural gas resources). Those predictions also ignored basic facts of supply and demand in that there is no shortage of oil in the world. Indeed, Saudi Arabia could supply all the world’s oil tomorrow morning, if it wished.
As such, the value of a barrel of oil, based on supply, extraction cost, shipping, refining, and profit, is about $30-$40. Anyone who claims otherwise is not being truthful. Saudi Arabia said recently that the price ought to be $75. That is wishful thinking and a mere marketing ploy. The realistic price is about 50% of that, or about $37.50/barrel.
Now that we have a severe global recession, the entire bubble burst and prices have come almost back to reality. But they are still too high.
Another reality is that OPEC is not a true monopoly. It does not control enough supply, and in any event its members cheat on output levels, because they cannot do without the revenue.
I expect oil to continue to trade in the $30-$50 range, but probably averaging $37.50/barrel.
I disagree with Frank a little bit — I see prices coming in over the long term at the long-run average total cost of marginal production (like every other commodity), which is more like $70. But his basic point is valid. Oil was never worth $147, and almost no actual barrel of oil ever sold for that price. Physical oil traded at a deep discount all over the world to the NYMEX during that time, because the $147 price was for a piece of paper, the CL contract, that certain parties had to have to close out their naked short positions on the futures exchange. To the extent that demand relative to supply was higher last summer than it is now, no question it was. But the current oversupply situation is working itself out and there is no prospect that the world will see shortage anytime soon, barring some cataclysmic event.
Mr. Hisam…please go to Google videos and watch the video titled, ” Energy Non-crisis” and you will soon learn who controls the price of oil and it is not who you think it is. James Brown, CEO, AtlantusAmericA, LLC
Do you want to stop big increases, or big decreases?
Personally, the big decrease HAS left me “unpunished”.
I don’t think any one person or group is responsible. I might blame the largest swings on speculators who jump on a band wagon, either buying oil or short selling it, they reinforce and amplify trends. But the biggest spikes are caused by wars in the middle east. The $147 spike was caused by Iran launching rockets, and there was a lot of talk of war with Iran before Bush got out of office during the rest of last summer.
Some is also caused by supply pushing up against the limits of production. I do not agree Saudi Arabia could supply the whole world tomorrow. They have a big supply, but there are limits how fast they can pump it and ship it. OPEC says it tries to keep the price stable, but they can’t pump more than their pipelines and ports can handle when the price is high, and when it is low, some countries cheat on their quotas.
Now demand is lower because of the recession. And prices are lower in the US than other places. So maybe the US economy is “sicker”, the recession is said to have started here and our response is more stalled and stonewalled than other countries. OPEC oil and Brent oil are ~$44 now. It is easy enough to say oil will more likely go below $30 than above $80. But how about above $50? I think the US price is the lowest, which is not usual, and prices will more likely edge upwards from now on.
Links:
http://www.eia.doe.gov/cabs/AOMC/Overview.html
http://www.energyintel.com/