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by Jerome a Paris
With oil prices briefly going over $96 this night, we're definitely within sight of $100 oil. In fact, for all instances and purposes other than the actual symbolic breaching of an arbitrary round number, we are at $100 oil - in terms of burden on the economy, cost of imports, and potential impact on our energy use.
And the big news is - there's no news. There's no recession. It's not a hot political issue. There's no Marshall plan to move to alternative energies. No debate about how to reorganize our economies with scarce and/or expensive oil. Which points to a simple conclusion: oil is still much too cheap.
And you see cheerleading articles explaining that high oil prices are a good thing as they are a sign of a booming world economy, and that they will go down soon because markets forces will come into play:
f you take the profits of these companies over the past four quarters and capitalize those profits at the appropriate capital cost, you get what each firm would be worth if it were to continue cranking out the past year's profits every year. But in each case the company's actual market value is lower; that is, the market expects each company's profits to fall, for which the only plausible explanation would be declining oil prices. Or, you know, that their production might decline, as it has over every single of the past 5 years. Because the real news of the day is not so much the oil price today, but this prediction by Total CEO Christophe de Margerie:
The world’s capacity to produce oil will fall well short of official forecasts, the chief executive of Total warned on Wednesday. This is a much more significant symbolic line than the $100 barrel. As all official predictions tell us, and as the rapid growth in both emerging countries like China and oil producing countries like Saudia Arabia or Iran underline, demand for oil is very likely to reach that level in less than 10 years unless we see massive behavior changes. Margerie is telling us that we are looking to serious imbalances between likely demand and likely supply in the very near future, and "suggested the tightness of supplies would be likely to keep prices higher." It's quite simple in fact. Supply is constrained by lack of production capacity (whether this is because of depleted resources or, like Margeris proposes, voluntary limitation of investment by oil-rich countries, is irrelevant). Demand will need to adjust. Prices will thus rise enough to cause demand destruction. Today's prices have only cut growth in the West so far (demand has been flat for 2-3 years even in the US) but nowhere else. So we'll need significantly higher prices to have overall stabilisation of demand, including very real demand reduction in the West and much lower growth elsewhere. Given how little we've reacted so far, I expect that we'll meed multiples of today's prices to see such changes.
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Countdown to $100 oil (51) - we'll never see 100mbd | 23 comments (23 topical, 0 editorial, 0 hidden)
Countdown to $100 oil (51) - we'll never see 100mbd | 23 comments (23 topical, 0 editorial, 0 hidden)
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