Oil , Galbraith and Loud Mouths.
I spent the entire week, trying to decipher the dynamics of oil prices.
Some people said, the supply said is messed up, but the Saudi oil minister was in town last week, telling anybody who bothered to hear him that anything above $ 50 /Barrel of oil is harmful to world economy. He doesn't want a penny more than $40-50/barrel. The monster is definitely NOT on the supply side.
The six year trend of consumption shows that US consumption has incresaed by 6 million barrels a day, where as the consumption by China and India increased by .75 million barrel/day and .5 million barrel/day, so much for oil sucking growth of the new developing countries.
The supply-demand analysis, leaves out the role of mercantile exchange. Mercantile exchange is like a stock market. always in search of information to distort the market, this week's Time magazine estimates the informatiom distortion premium is about $15 /barrel. This is the cumulative value the traders at Mercantile exchange have added to the price of barrel by listening to the irresponsible statements that come out of the adminsitration regarding Iran, Venezula and now Russia.
The analysis and solutions, thrown around might not make any impact on the oil prices.
Solution 1: Send a check, this is outrightly rejected.
Solution 2: Windfall tax, this will lead to a response form the companies, not to invest. The oil companies haven't invested in refining capacity in the last 25 years. The govt. can set aside some amount of the windfall profits for refining capacity expansion and drilling. Might have some impact on long term prices.
Solution 3: Oligopolistic nature of oil industry in USA and needs some attention. This analysis has some merit, despite the fact that opponents argue thatcompanies like SABIC are much bigger and have tremendous economies of scale while drilling. SABIC example can't be applied to ExomMobil, or anybody else, because SABIC doesn't have customer contact and drilling activity of Exon Mobil is very limited. Bulk of US oil companies'profit come from refining imported crude oil. So, it will definitely help customers if refiners-marketers are made to compete with each other.
Solution 4: Drill ANWAR, proven reserves of ANWAR are so low, it may not be worthwhile drilling that area, unless the crude price can be maintained at $75+.
The issue of doing something about the price brings us to Galbraith, a brilliant economist who passed away this week. He was the last official price fixer (Office of Price Administration) during World War II. Many of his writings were influenced by this experience, he wrote, one should always look for elements in a system that get automatically incorporated and destructs the system.
The current elements that are destructive in the oil pricing syatem are:
1)Growing American demand, much more than any other nation.
2)Growing Illegal population making demand predications go awary.
3) Inept handling of foreign policy in middle east and other oil producing regions providing oil traders fodder to jack the price. Dick Cheney was ridiculing Russia this week, so Russia's support for any resolution on Iran goes thru the window. Russis still has a score to settle with USA, over Afghanistan. Imagine the chaos that will be unleashed if Russia sends anti low flying aircraft missiles to Iraq.( This is the strategy used by the current US ambassador to Iraq to win the Afghan war 1 )
4)Strong Oligopoly in the oil market, focussed on profits and not on investing the profits.
Solutions I suggest are
Short Term:
Silence the likes of Rice, John Bolton and Dick Cheney. There should be a moratorium on the use of word Iran in the state department. If US is concerned about proliferation, the nation to be taken to task is China, which generously gave away missile and nuclear technologies to North Korea, Iran and Pakistan.
Many oil producing countries have said they would like to see oil price to be settle at $50/Barrel. Enter into long term contracts at 55 Dollar level with these countries ( Some body suggested going to WTO to coax more oil out of OPEC, unfortunately WTO deals with cross border trade amd unfair subsidies, and cannot force countries to produce what the world wants.
3)Reduce internal shocks to oil demand like unregulated population growth, so the illegal population has to be reduced.
Medium amd Long term:
1)Alternate fuels (Ethanol and Hydrogen)
2)Public Transport.
3)Fuel Efficient Vehicles.
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