Are sky-high oil prices ahead?
One thing about the oil market: it's bound to hold your attention, whether you're an investor looking for growth plays or just a typical car owner. Certainly if you're an American driver, oil is holding your attention. Just take a look at that gas pump price: a national-average, regular unleaded gasoline price that's risen about 60 percent (!) in six short months, to about $2.63 per gallon, according to data compiled by gasbuddy.com. Moreover, the price rise is all-the-more exasperating because it's occurred while the U.S. economy is in recession, with millions of drivers taken off the road, due to belt-tightening and job-layoffs.
Most of the roughly $1 per gallon rise in gasoline prices stems from the $35 per barrel increase in oil's price since December 2008, to about $71 per barrel on Friday.
Why has the price of oil basically doubled despite the fact that the U.S. and global economies are still in recessions? Among other factors, institutional investors, citing 'green shoots,' are calculating that each recession has bottomed - the recoveries may have already started - and that implies increasing oil demand in the quarters ahead, hence they're positioning themselves in what they believe will be a high-return asset: oil.
Are sky-high oil prices ahead...again?
What? Another period of sky-high oil prices? (As if $70 wasn't high enough!) The aforementioned is likely to be greeted by Americans with the same enthusiasm as a resurgence of the H1N1 flu. American consumers and business executives know what a high oil price does to the U.S. economy: it severely reduces consumers' disposable income and increases business costs at virtually every stage of the production process. It also increases inflation. And sky-high oil price eras - the world's three oil shocks - have been major factors in the U.S. recessions of 1973-74, 1979-80, and 2008-9. Further, the U.S. is still recovering from the effects of $147.27 per barrel oil surge of 2008: a second run at $100-oil would be like a left hook from former heavyweight boxing champ 'Smokin' Joe Frasier: a devastating blow. Are we destined to experienced another, prolonged period of $100 oil, or even worse? Here are two competing arguments.
Veteran oil analyst Matt Simmons says we are. Simmons, founder of Simmons & Co., argues oil's price plunge from record-highs last year to below $50 took many oil fields out of production. The low oil price forced many oil companies to delay projects, decrease the number of rigs deployed, consolidate operations/lay-off staff, and above all, to abandon expensive projects. That deceased production, plus aging oil fields and the credit crunch's impact on oil exploration, help set the stage for the current price rise. What's more the price rise will continue, Simmons argues, because producers will not be able to increase global oil supply fast enough to keep up with soon-to-be rising global oil demand. Simmons believes the average daily price of oil in 2010 will be $200 per barrel (in 2005 dollars).
Bloomberg Columnist William Pesek says visions of $200 or $250 per barrel oil represent a stretch, at best. Much of that rise in oil's price, Pesek says, hinges on China's ability to drive global growth. However, a considerable portion of that China-based demand is for raw materials, and will not lead to large, spin-off growth effects for economies in Asia, or globally. In other words, China's economy is not going to create demand for parts and other goods assembled outside China, and once investors realize China's still-export-oriented economy can not grow more than 6 percent per year, the commodity bubble or "bubble of belief" will burst, and so will oil's price. The key point in Pesek's thesis is a frugal consumer era, led by reduced consumption in the United States – a major market for China's exports. Once it's clear exports will not return to pre-recession days, China's lopsided economy will be exposed, and down goes the price of oil and commodities. Those calculating that a China boom will lead to $250 oil are in for a disappointment, Pesek said.
Oil Analysis: Columnist Pesek offers evidence that dispels notions that China's economy, currently structured, will be the global growth engine that many expect it to be, but it's awful hard to take a position against Matt Simmons, one the oil industry's best analysts. Further, oil's vault to $70 in a macroeconomic eye-blink, amid the recession, is alarming, so the bias here tilts toward Simmons' analysis. From a U.S. standpoint, that only underscores the need for a national energy policy, and President Obama's policy to increase vehicle fuel efficiency and conservation by businesses and homes represents a good first step.
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Reader Comments (Page 1 of 14)
6-19-2009 @ 3:34PM
realist said...
Pesek is off the mark by one major factor. He has failed to consider the greed of oil companies and also OPEC in the equation. Increased retail prices of gas started to happen slowely when oil was still in the low $40s per barrel. Everyone with half a brain noticed that the price of oil was NOT related to supply and demand. When China's so-called bubble will burst - it will NOT NECESSARILY translate into oil prices sliding downward.
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6-20-2009 @ 9:23AM
tom Williams said...
If you look at refinery capacity, they were operating @ about 81% -85% even at the bottom of the demand curve, rather than the 85-91% that they were running during the $4/gal. period. The extremely low prices were an aberration, an over reaction to a demand that really only dropped about 10% at most.
6-20-2009 @ 10:14AM
Chris said...
You may be a realist but you don't know what you are talking about. Oil prices are not controlled by the oil companies. They only buy the oil from OPEC. You really need to look at OPEC and the value of a dollar. Since January, the value of a Euro has increased from about $1.25 to $1.40. Since oil is priced in dollars and dollars are worth less, the result is higher prices. Now the dolar is worth less because the government is spending like a drunken sailor on liberty so you might want to look at Congress and the White House. Production is down from OPEC, but you really can not ignore what is going on in Washington.
6-20-2009 @ 11:11AM
Patriot Games said...
This is how it all began. This book is the most comprehensive investigation into the tyranny of current world events I have ever read. It made my skin crawl.
http://www.captaincanadacrusades.ca/articles/none-dare-call-it-conspiracy%5B1%5D.pdf
6-20-2009 @ 11:33AM
Nick said...
Precisely! I find it interesting as well that all of a sudden, oil prices now hinge upon a whole new set of indicators like..."speculation," and "optimism." Where did these BS terms come from all of a sudden?! When oil prices were literally crushing the poor American slob's back, the greedy maggots lined up on Capital Hill to tell us that it was all directly linked to "supply and demand." So here we are again, being led down the path of destruction by another "catch phrase."
6-21-2009 @ 12:43AM
rizzman said...
Chris - your more or less - an idiot, Do your homework dude, OPEC by large only produces 40% of the oil consumed - the only reasons people rant about OPEC is because its essentially a handful of Arab producers who control "Almost" Half of the market, and it's an easy scape goat for politicians to avoid addressing the issue due to negative tensions in the area. so where is the other 60% your asking? 10% from African wells, and ... Dun dun dun - 50% from the US. Thats right folks, good ole country men, screwing country men - don't take my word for it though, look it up
6-21-2009 @ 7:00PM
jeff said...
Oil prices can't go up to $147 a barrel again because Bush isn't President anymore and dummycrats said Bush was the one that made oil skyrocket.
6-19-2009 @ 4:09PM
Iridium said...
Simmons is playing the terrorist game here. He is 100% correct if you only use hedge funds and intitutional investors as the price guage.
He is 100% incorrect that oil companies have taken projects off the table because oil declined below $50. Projects were taken off the table becuase the demand was not there. There was an increase in exploration and drilling because any company would be stupid to not pull out as much as they could at $147 a barrel. A full $140 above the cost of what it takes to pull out of the ground.
I will say it again. A few short years ago when oil first started to take off every oil company said it would be profitable to drill anywhere in the world at $40 a barrel. At $60 a barrel they said it would be profitable to build rigs on the bottom of the ocean.
Simmon's wants oil to trade at $150 because he will benefit from it. I would bet good money that he has been paid off to write just those types of stories. The man is a pig and should burn along with the rest of the market terrorists holding the world hostage for ransom.
You won't find a single rig operator that will tell you oil needs to be at $100. Most of them will tell you they were exploring new fields and pulling in a mighty profit when oil was $18 a barrel.
I don't recall Exxon being in the position of GM when oil was $18 a barrel. If I remember right they were still one of the most profitable corporations on Earth, WHEN OIL WAS $18 A BARREL!!!!
Oil is set for a rapid rise for one reason only. The market was openned up to the greediest people on Earth due to congressional representatives being paid off and they decided to rape the population to fill thier pockets. There is no other explanation and the point isn't even debatable. I'm tired of the argument because anyone advocating higher oil prices can't come up with a single figure or piece of data that can back it up.
The only argument they use is future speculation of increased oil consumption. I don't know how that can be supported because the real data from the supposed boom years couldn't even support a price above $40. THE DEMAND FOR $100 OIL DOESN'T EXIST PERIOD!!! THE DEMAND MODEL FOR OIL ABOVE $35 DOESN'T EXIST PERIOD!!!!
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6-19-2009 @ 5:04PM
lou said...
Now, of course, the oil and gas companies are bribing congress through lobbyists to slow up funding on investigating other means of energy besides their beloved fossil fuel.. They are winning in many corners, much to our nation's loss. The only answer is alternative energy sources. The Chinese are working hard on wind. When they do convert much of their energy needs away from oil we Americans will whine, but will continue to bury our heads in the sand and with our back sides in the air getting kicked by emerging nations. We need to again be a nation of forward thinking people.
6-20-2009 @ 1:34PM
Richard said...
I AGREE! Well said, why wont people listen???
6-21-2009 @ 10:32AM
MICHAEL said...
EXCELLENT POST !!!!!!!
6-19-2009 @ 4:58PM
Drew said...
The problem here is that we should be working on our energy independence, not healthcare, first. Unless giving up our nation to others has been a goal of the current administration, the security of all of us depends upon our breaking the oil hold NOW before it's used against us to keep our recovery down, therefore muting any sort of military response to any threat. As GM's financial failure posed a threat to our economic health, why has not the current administration come out against the oil companies and took them over? Are we playing politics with the lives of our children? Yes. The small amounts of money these politicians will rake in will not buy their freedom back once taken, nor ours.
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6-20-2009 @ 8:02AM
Gene said...
Big Oil needs Obama's Stimulus money and they aim to take it whether he likes it or not!!!!!!!!!!!!
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6-20-2009 @ 8:05AM
dxxy4u said...
Let's get one thing straight, Big Business IS NOT your friend. Just because their Names are household names, doesn't mean that they give a damn about you, only your MONEY they are after. And they will get it by any Hook or Crook means.Period.
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6-20-2009 @ 8:09AM
jerry said...
bush did it!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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6-20-2009 @ 8:14AM
Mark said...
Oil and gas prices are being engineered by Barack Obama and George Soros to FORCE Americans into cars Americans dont want.
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6-21-2009 @ 9:59AM
Mike McKibben said...
BS!
6-20-2009 @ 8:19AM
tommytortugam said...
Top Senate Democrat:... Bankers "own" the U.S. Congress
Sen. Dick Durbin, on a local Chicago radio station this week, blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." The blunt acknowledgment that the same banks that caused the financial crisis "own" the U.S. Congress -- according to one of that institution's most powerful members -- demonstrates just how extreme this institutional corruption is.
The ownership of the federal government by banks and other large corporations is effectuated in literally countless ways, none more effective than the endless and increasingly sleazy overlap between government and corporate officials. Here is just one random item this week announcing a couple of standard personnel moves:
Former Barney Frank staffer now top Goldman Sachs lobbyist
Goldman Sachs' new top lobbyist was recently the top staffer to Rep. Barney Frank, D-Mass., on the House Financial Services Committee chaired by Frank. Michael Paese, a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank's committee in September, will join Goldman as director of government affairs, a role held last year by former Tom Daschle intimate, Mark Patterson, now the chief of staff at the Treasury Department. This is not Paese's first swing through the Wall Street-Congress revolving door: he previously worked at JP Morgan and Mercantile Bankshares, and in between served as senior minority counsel at the Financial Services Committee.
So: Paese went from Chairman Frank's office to be the top lobbyist at Goldman, and shortly before that, Goldman dispatched Paese's predecessor, close Tom Daschle associate Mark Patterson, to be Chief of Staff to Treasury Secretary Tim Geithner, himself a protege of former Goldman CEO Robert Rubin and a virtually wholly owned subsidiary of the banking industry. That's all part of what Desmond Lachman -- American Enterprise Institute fellow, former chief emerging market strategist at Salomon Smith Barney and top IMF official (no socialist he) -- recently described as "Goldman Sachs's seeming lock on high-level U.S. Treasury jobs."
Meanwhile, the above-linked Huffington Post article which reported on Durbin's comments also notes Sen. Evan Bayh's previously-reported central role on behalf of the bankers in blocking legislation, hated by the banking industry, to allow bankruptcy judges to alter the terms of mortgages so that families can stay in their homes. Bayh is up for re-election in 2010, and here -- according to the indispensable Open Secrets site -- is Bayh's top donor:
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6-20-2009 @ 8:24AM
robokop said...
Great job so far King Hussein. 9.4% unemployment-you said would reach 8% if stimulus passed. Unemployment still going up along with the National Debt. Wars are still going on, troops still in Iraq, Afgan war expanded. King Hussein cutting off persons rights on a daily basis. Partiot Act still intact and being used daily by the Chicago Thug in the White House. Crooks are being appointed to run the Govt by King Hussein. Racist picked for Supreme Court. King Hussein taking care of rich CEO's and bailing out the rich stockholders, all while unemployment climbs. USA now ownes GM and Chrysler, Banks and other mega Corp.s. King Hussein's about to wreck medical care in USA, 1.6 trillion cost without giving everyone medical coverage. 27 million will still not have medical. Free choice for medical also gone, leaving only one provider, the Obama USA Governmen. We are now in a country with a government for King Hussein, run by King Hussein, all bow down please.
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6-20-2009 @ 3:22PM
bob said...
hey you have it wrong it was Bush who thought he was a king. his way or no way . And of the republicans and the religious right and the so called conservatives said amen. Obama has had only 6 months th try to fix the crap thathero caused . he bailed out the banks and the investment folks on wall street . he put the country in the hole it is in now . Wake up stupid you voted not 1 time but 2 times for the phoneys . we have lost to many of our brave troops and the war goes on . ya he was a real leader just like the rock man that was to busy to go to nam like me he had better thing to do . yet they will fight to the last kid of some one else . ya like romney 5 sons not one in the military but he would send my kid at the drop of a hat . wake upfolls these guys are just losers and folks like you give them th press they want