Here in the US it costs three times what it did only a few years ago to fill the Land Rover. Up against encroaching thoughts of dusting down one's old bicycle, one wonders why?
The triple-digit oil price has four clear influences: a surging global economy; tight capacity; good but uncertain supply; and financial forces only loosely coupled to oil.
People are doing well, starting businesses, borrowing money and spending it on productive enterprise; all this activity requires transportation, heat and electricity, a great portion of it provided by oil. China, the world's most populous country ( 1.3 billion, GDP per capita of $2,460) is developing an urban middle class. India too, the world's second largest country (1.1 billion, GDP per capita $965), is gaining similarly. Off low bases, such vitality increases worldwide competition for energy resources with direct effect. Oil demand is thus firm, growing and seems unlikely to relax.
Capacity is not too abundant. As of April 2006, spare oil refining capacity had narrowed to a bit less than 3 percent of demand, said oil expert Leo Drollas of London's Center for Global Energy Studies. Low oil prices in the 1980s and 1990's had quelled investment in facilities and people; but higher prices now are driving expansion again.
Current oil stocks are low. According to The Economist:
"Every time a tempest brews in the Gulf of Mexico or dark clouds appear on the political horizon in the Middle East, jittery markets have pushed prices higher. This week, it was a cold snap in America and turmoil in Nigeria that helped the price reach three figures."
Supply seems precarious. Nigeria is torn by bitter local rights disputes. State-run oil regimes like in Russia and Venezuela are withholding supply from open market trading. Iraq is an unknown. Tensions with Iran make Persian sources unlikely. Worries about the future stretch the risk-premium of the barrel price.
Reserves (in the ground) are ample but not certain. The Oil Sands in Fort McMurray, Alberta, Canada, hold more oil than the Arabian Peninsula by some measures, for example, yet environmental concerns and the high costs of extraction mean this abundant potential may not count.
Shifts of capital are in play, too. Leo Drollas notes that the amount of money tracking commodity indices increased almost ten fold between 2001 and 2006 to about $70 billion. Oil, a good portion of the commodities index basket, is bid up merely due to mechanical index-matching flows into futures contracts. Arbitrage then pulls up the current spot price of a "wet" barrel to meet the technically driven futures price, unrelated to fundamentals.
Currency weaknesses punish oil-importing nations and we feel this acutely at the pump. A falling dollar makes the imported barrel more expensive at home. Americans consume 20.6 million barrels per day, of which only 6.9 million barrels originate domestically. Americans are therefore vulnerable to currency effects on more oil than the number two consumer, China, uses overall.
Oil the bicycle, Darling! But sparingly.
Here, in Europe, one encounters high oil prices, too, but—thanks to the strong €—we are able to absorb the increasing oil price. I really wonder, what future brings to the USA, for it is still widely involved in the global trade.
Posted by: Renke Grunwald | March 07, 2008 at 05:16 PM
Economics 101: a nation can buy guns or it can buy butter, but it can't do both at the same time.
We've been fighting two wars for five years now near totally financed by debt and deficit spending. To boot, we passed out tax cuts instead of raising taxes to pay for our wars as we go. I.e., our leaders are trying to have guns and butter at the same time. The result is the all too predictable steep devaluation of the dollar against other nation's currencies.
Throw into the mix that the U.S. agreement with OPEC has OPEC requiring that all customers internationally pay for oil in U.S. dollars. As our currency devalues, OPEC raises its prices to acquire the same value in the currency exchange markets.
Enter stage left the mortgage crisis as the increased cost of petroleum and foreign goods work their way through the economy, leaving increasing consumers unable to maintain their mortagage payments.
How does the Fed respond? Inflate our way out of the mortage crisis; increase the money supply so fewer consumers will face foreclosures and bail out the mortgage lenders with government insured loans. Keep the bubble expanding.
But that just leads to further devaluation of the U.S. dollar against foreign currencies and predictably higher costs (in U.S. dollar terms) for imported goods and raw materials like petroleum.
I can't even remember how many times I've seen the same cycle repeat in my own lifetime. But I have firm memories from the late 1960s of top sirloin steak selling for 17 cents a pound at the grocery store, cigarettes selling for 19 cents a pack, and 17.9 cents per gallon gasoline.
I was a journeyman union typographer in those days, earning about $650 per month. I bought a new car every year and had money left to burn.
I also vividly recall a elderly "tramp printer" I worked with for a few weeks as he passed through. He showed me a pay stub from 1903, when he was making 1-1/2 cents per hour in the same trade and said that was big money in those days.
I guess what I'm trying to impart is the view that our economy is being severely mismanaged. Our current crop of powers that be are playing for time instead of paying the piper, hoping they can keep the bubble inflating until it's someone else's problem.
And so it goes. Inflation is the cruelest tax of all but the easiest to impose. Economists may teach that you can't have both guns and butter at the same time, but political history teaches that the U.S. nonetheless has invariably resorted to the printing press to pay for its wars. The resulting devaluation is inevitable.
Posted by: Marbux | March 29, 2008 at 09:39 AM