Left-handed Complement

MUDGE’s Musings

Oil prices. A very hot, very sticky, very crude topic. We’ll look at four versions of reality.

MUDGE‘s reality: $4.259/gallon at his neighborhood Shell.

From the mosaic, we can hope that some kind of truth emerges.

No question that we are living in interesting times.

Oil spill no. 1. How high is up?

$200 a barrel petroleum. If you think your world is changing around you, buckle up.

Will Oil Really Hit $200 a Barrel?

By Desmond Lachman | Friday, May 30, 2008

Rudi Dornbusch, the renowned economist, once said that he did not understand how Mexico’s central bank board members could make the same mistakes time after time. Looking at the ongoing frenzy in the global oil market, one appreciates what Dornbusch meant. Once again, many market participants appear to believe that oil prices can only go up. It seems that the painful lessons of the 2001 dot-com bust have been forgotten, as have the lessons of the much more recent U.S. housing crash.

In their state of forgetfulness, many pension funds and insurance companies have built up very large open positions in the oil futures market. These positions are now estimated to total over $200 billion, roughly the equivalent of a full year of Chinese oil demand. They have contributed to the recent spectacular run-up in oil prices.

To be sure, there are many reasons why global crude prices have doubled over the past year from $65 a barrel to an all-time record of $135 a barrel. For starters, it has become increasingly apparent that world oil production is stubbornly stuck at around 85 million barrels a day; new oil production coming on stream is approximately offset by the depletion of the world’s major and aging oil fields. This depletion is occurring at a time when emerging market economies such as China and India are growing rapidly and their citizens are becoming increasingly energy-intensive in their consumption habits.

The writer makes a very useful observation. Skyrocketing oil prices are bound to slow economies in the developed world. In which case, those cheap manufactured goods wending their way across the Pacific in that endless line of giant container ships might not have buyers at the other end.

When that happens, when the orders in China and Vietnam start drying up, how long before their oil consumption begins to falter?

Sky-high oil prices pose a serious threat to global economic growth, and a global slowdown would undermine the very basis of those prices. No, oil prices cannot rise forever, despite what many of today’s market participants seem to think.

[Please click the link below for the complete article — but then please come on back!]

Will Oil Really Hit $200 a Barrel? — The American, A Magazine of Ideas

I don’t believe that we have sufficient imagination to predict the outcome of such an economic tsunami. But…

Oil spill no. 2. Maybe “up” is now?

Maybe we don’t have to wait until China’s ginormous industrial output grinds to a halt as Wal-Mart’s orders run dry.

Our next correspondent feels that oil prices just might be this year’s “bubble.”

6 Reasons Why Oil Is Ready to Drop

May 28, 2008 03:07 PM ET | James Pethokoukis

I think the “oil is in a bubble” meme is gaining strength. Market strategist Ed Yardeni thinks the hysteria may be ready to wane. His reasons:

1) Russia is scrambling to cut taxes on its oil industry to boost investment in new fields and to reverse a looming decline in production.

2) Brazil continues to find more oil offshore in the Santos Basin, a collection of potential oil fields that could be one contiguous megadeposit of crude oil.

3) In the US, Congress may start considering ending longstanding bans on domestic drilling.

4) Asian countries are starting to reduce their domestic fuel subsidies, which could dampen demand.

5) Americans are driving less. The Transportation Department reported Friday that in March, Americans drove 11 billion fewer miles than in March 2007, a decline of 4.3%.

6) American Airlines said it would reduce flights in the face of soaring fuel costs. Air France warned of a profound restructuring of the world airline industry.

Sounds like economic trends are forming that perfect storm early. In other words, oil prices today are high enough to create pressure to cut the price.

History may prove to be a better guide to future oil prices than we now imagine. This is why I consider oil prices to be a bubble. Oil has reached a level that it will not be able to sustain—at least not without some significant retrenchment.

[Please click the link below for the complete article — but then please come on back!]

6 Reasons Why Oil Is Ready to Drop – Capital Commerce (usnews.com)

Oil prices already at a peak, bound to retrench? A nice thought, for the short term.

Oil spill no. 3. I am shocked, shocked. Oil prices may have been illegally manipulated!

Intriguing how all the news seems to converge. Here’s a disturbing story about a Federal investigation that might help explain what’s been going on. Maybe more criminomic forces (a new MUDGE coinage, and you’re welcome to it!) than economic ones were at work boosting petroleum prices.

Probe of Crude Oil Trading Disclosed

By Steven Mufson | Washington Post Staff Writer | Friday, May 30, 2008; Page D01

During continued volatility in oil prices, federal regulators said yesterday that they had been investigating crude oil trading, storage and transportation for the past six months with a focus on possible “futures market manipulation.”

The Commodity Futures Trading Commission, which normally keeps investigations confidential, said in a statement that it was “taking the extraordinary step of disclosing this investigation because of today’s unprecedented market conditions.”

Those conditions have sent oil prices to record heights, adding to the U.S. trade deficit, hurting consumers and companies, and weighing heavily on the nation’s economy.

So, the government is getting around to investigating that traders and big time investors, those wonderfully benign and trustworthy types whose banking confreres brought us the subprime mortgage debacle, might have been behind much of the recent rise in petroleum prices. I am just shocked, shocked.

As Claude Rains put it in the immortal Casablanca:

I’m shocked, shocked to find that gambling is going on in here!

Meanwhile, in this rather an omnibus of a story the Post reports that prices have been exceptionally volatile lately; that MasterCard reports gasoline purchases down (“honey, that trip down to Branson to see that Elvis show for our vacation week just isn’t going to work this year”); and a guy from OPEC thinks that prices just might be too high.

[Please click the link below for the complete article — but then please come on back!]

Probe of Crude Oil Trading Disclosed – washingtonpost.com

All of these converging trends might lead one to believe that gasoline prices might be at a peak now.

Not so fast, kiddo.

Don’t let a retrenchment go to your head. Long term, we need to kick the petroleum as fuel habit.

Oil spill no. 4. Short term relief might be possible. But long term, we must change

Thomas L. Friedman calls the candidates to account.

Truth or Consequences

Op-Ed Columnist | By THOMAS L. FRIEDMAN | Published: May 28, 2008

Imagine for a minute, just a minute, that someone running for president was able to actually tell the truth, the real truth, to the American people about what would be the best — I mean really the best — energy policy for the long-term economic health and security of our country. I realize this is a fantasy, but play along with me for a minute. What would this mythical, totally imaginary, truth-telling candidate say?

For starters, he or she would explain that there is no short-term fix for gasoline prices. Prices are what they are as a result of rising global oil demand from India, China and a rapidly growing Middle East on top of our own increasing consumption, a shortage of “sweet” crude that is used for the diesel fuel that Europe is highly dependent upon and our own neglect of effective energy policy for 30 years.

As noted previously, $4.00/gallon fuel is cheap (truck drivers demonstrated in London the other day against $9.00/gallon diesel fuel!). But cheap relative to the world is still oppressively dear relative to our paystubs.

We need to reset our expectations. Friedman would like to see one of the candidates (and we guess we know which one he means, the one of the three who has not so far pandered to the crowd so superficially where this issue is concerned) step up and tell the electorate what they need to hear, and what most politicians refuse to say.

We must not make that mistake again. Therefore, what our mythical candidate would be proposing, argues the energy economist Philip Verleger Jr., is a “price floor” for gasoline: $4 a gallon for regular unleaded, which is still half the going rate in Europe today. Washington would declare that it would never let the price fall below that level. If it does, it would increase the federal gasoline tax on a monthly basis to make up the difference between the pump price and the market price.

Proud Prius owner Friedman doesn’t have a lot of patience for we who cling to our SUVs (how self-righteous is that?); we changed our profligate habits after the oil shock of the 1970s, let ourselves get lulled by artificially low prices, and now we need to change them once again.

[Please click the link below for the complete article — but then please come on back!]

Op-Ed Columnist – Truth or Consequences – Op-Ed – NYTimes.com

In the 1970s, carmakers responded desperately with truly horrible small cars (pictured here is one of yr (justifiably) humble svt‘s all time favorite dogs, the American Motors Pacer).

Today at least there are more competent options, some even sold by U.S. auto manufacturers, for those who can afford to, or those who have the fortitude to, replace their Explorers and Trailblazers with vehicles that sip rather than gulp.

The last century was defined by its world-wide wars, and also by its application of petroleum powered individual transportation in developed countries to totally transform what once had been a mainly rural landscape, in the process making suburbanites and indeed exurbanites of so many of us.

This new century (seven years in, is it still new?) will see massive changes in the ways people move around. The era of personal transportation isn’t over by any means (remember there’s a company in India, Tata Motors, about to build a $2,500 car for its domestic market), although in order for it to sustain, the nature of transportation’s motive power inevitably must shift away from petroleum.

As Mr. Friedman might add: or else.

It’s it for now. Thanks,

–MUDGE

This entry was posted on Friday, May 30th, 2008 at 9:35 pm and is filed under China, Economic depression, Economy, India, Politics, Presidential election. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.