Oil and Politics by Richard Heinberg

Oil and Politics
By Richard Heinberg
t r u t h o u t | Perspective

Wednesday 14 May 2008

On Tuesday, Senate Democrats introduced legislation that would halt a US arms sale to Saudi Arabia worth $1.4 billion. The implication is clear: no more war toys for the Saudis unless they agree to up their oil output.

The same day, the House approved a Senate plan to suspend oil deliveries to the Strategic Petroleum Reserve in hopes of diverting that oil to the market, thus lowering the pump price a tiny amount.

A week earlier, a handful of senators proposed a bill threatening a trade dispute with members of OPEC if the organization doesn't stop its "anti-competitive practices and illegal export quotas on oil."

It's understandable that our elected leaders would want to do something about the meteoric rise of gasoline, diesel and heating oil prices that are now bankrupting independent truckers and forcing many folks in colder states to choose between being able to stay warm and being able to drive to work. Yet, efforts like the ones just mentioned are based on a profound misperception of why oil prices are rising.

more...

http://www.truthout.org/docs_2006/051408R.shtml

And we need to find alternative sources of energy, but I think a lot of what is driving prices higher right now is that investors are buying up commodities like oil because of the love value of the dollar. The FED keeps lowering interest rates which keeps the dollar low and investors are taking advantage of that and buying up oil with EURO's and holding on to the oil till the price goes sky high before they sell. Then when the prices come down say 5 or 6 dollars per barrel, they buy it back up and the process starts over again. They are the problem right now in my view.

I found this article particularly illuminating regarding the world oil situation:

Maybe it's just a coincidence that the price started its steep rise during the same year that available supply fell below demand. Why does the crude oil price keep rising? Econ 101 helps us out here.

1. There has been no downward shift in the global demand curve accompanying the price rises over the last 8½ months. On the contrary, the demand curve seems to be moving up and to the right (graph below). Subsidized oil demand in China, the OPEC countries and other developing economies shields consumers from price increases. Consumption in the OECD countries (including the U.S.) is largely inelastic (i.e. insensitive to price increases) in the short to medium term.
2. High prices since 2003 have not stimulated a supply-side response that allows the oil markets come into balance at a new equilibrium price. The world's oil supply has been almost perfectly inelastic since 2004 (first graph above).

This one-two punch forms the meat & potatoes of the oil price hikes — everything else is gravy. The Nymex WTI price and the price on other exchanges all over the world has shattered the inflation-adjusted highs of 1980, so we no longer have to deal with the obligatory references to the previous record anymore. Thank God for small favors.


It's Not An Oil Price Bubble

Some economists like lots of gravy with their meat & potatoes, never passing up a chance to transform the essentially simple into the marvelously complex. Without the benefit of a longer term perspective on the fundamentals, it is always possible to analyze shorter term price movements to death, although Paul Krugman eschewed such confusion in The Oil Nonbubble, New York Times, May 12, 2008.

The Wall Street Journal's Bubble Isn't Big Factor in Inflation surveyed 53 economists to see what their gustatory preferences were. The gravy-lovers, 20% of those surveyed, thought speculation or central bank policy was responsible for the recent oil price hikes (graph left). The rest were meat & potatoes people, and eight of them actually said that "supply constraints" were the most important factor driving energy inflation. Bravo!

A CNBC analyst noted that demand had not increased by 43% , so why has the price moved up by that much in 2008? (Actually, 35.5% over the January average price.) Shouldn't something else be driving the price?

First, the relationship between price and demand needn't be one-to-one and linear, meaning that an X% price increase does not necessarily require an X% increase in demand (3rd graph above, I suppose this is why he's on CNBC and I'm not.) Most of price rise since the beginning of the year is still driven by the fundamentals. Nonetheless, some reputable economists (e.g. James Hamilton's Commodities and the Fed: Answering the Skeptics) believe that a growing supply & demand imbalance is insufficient to explain the steepness of the price rise during 2008. Be this as it may, there is always some slop in the oil price taking the form of premiums on the "base" price resulting from different factors.

My best guess is that the base (floor) price is now somewhere around $110/barrel and the current premium, which is ≅ $15/barrel, results from investors (a.k.a. speculators) riding the oil (commodities) price wave as a hedge against uncertainty in the financial markets the shaky dollar, and the economic slowdown in the United States. They're surfing! These commodity transactions are encouraged by the low interest rates and low upfront costs on buy orders. But remember, there have also been some significant supply disruptions in Nigeria lately, where production fell 250,000 barrels per day from March to April of this year.

Prices may fall later this year, but will not likely dip below the $110/barrel floor price. It is actually more likely that the price will continue to rise this year, as Goldman Sachs believes, because 1) stuff happens, e.g. deepwater project delays, project cost inflation, blown-up pipelines, and 2) we are now living in Flatland.

more...

http://www.energybulletin.net/44192.html

Check out the graphs, I think it's a pretty good presentation of what the big picture is.