Where Will Oil Go From Here? 26 comments
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Some coming attractions that will impact the price of oil are predictable:
1. OPEC will cut production - or at least announce that they will cut production - probably by 1 - 2 mb/d
2. The unfreezing of the credit system should proceed apace over the next month accompanied by a reduction in LIBOR, the unfreezing of shipping, and maybe an uptick for the Baltic Dry Index.
3. The coming recession will be nasty: maybe 9% - 11% U.S. unemployment; weakness in Europe; substantial deceleration of growth in Asia and oil exporting nations. It will be impelled by further U.S. credit contractions in terms of credit card lending, automobile lending, and mortgage lending. And the headlines will include a bunch of corporate bankruptcies including probably GM and Ford (F). As the recession proceeds, state and local governments will be under great pressure to cut spending thus adding to recessionary forces.
4. To counter all these deflationary trends the federal government will try its best to reflate the economy through spending programs on infrastructure, grants to states, and growth in military personnel. Chances are this effort will be too little and too late.
5. Oil consumption will decline with the OECD economies’ weakness; in oil exporting countries as their cash flows dry up (remember the growth of oil consumption in the oil exporting countries has been fueling half the increase in consumption globally) and there will be much less growth of oil consumption in Asia. Over-all we could see a drop in oil consumption of 500 - 1,000 kb/d in 2009 compared with 2008, which itself should turn out to be flat vs. 2007.
6. The U.S. federal budget deficit will expand to never-before-contemplated levels which will come on top of the wild expansion of U.S. federal debt resulting from various mistaken Bush policies on spending and revenue. The ultimate risk of this period may well be a possible run on the U.S. dollar as people begin to realize that with social security and medicare deficits fast approaching the U.S. federal government no longer has the ability to tax its economy sufficiently to pay for its growing obligations.
What we do not know is the timing. How fast will the economy unwind? How long will the unwinding go on? Will it feed on itself to be a virulent depression? When will governmental reflation efforts - in many countries - begin to bite? When will currency re-alignments happen?
Without knowing the timing it is hard to predict the sequence of price changes for oil, for the dollar, for gold or for stocks. But I think of all the unknowns, the most predictable is oil. Here’s why: all the above known future developments are bearish for the oil price - they all tend to depress demand - except for two. The first is the cutback in production by OPEC. The second is a possible fall in the value of the U.S. dollar. Of these two, I doubt that the OPEC cutback will have OPEC’s desired effect of stopping the oil price fall because each barrel of oil OPEC decides not to produce is one more barrel of oil added to OPEC’s reserve capacity. In my view, the price of oil is not only determined by immediate supply and demand. It is also a matter of how much reserve capacity the market can see. One reason for the early 2008 oil price spike was a clear lack of reserve capacity. But as new Saudi production has come on stream and global demand has softened, reserve capacity has been built. So a cutback by OPEC, I think, even if its members adhere to it (which is less than 100% certain) will have a limited ability to push up the price of oil.
The second factor, a fall in the U.S. dollar is hard to predict. I rather suspect that will not happen until the deflationary tendencies of the recession are overtaken eventually by inflationary tendencies caused by Treasury pumping out dollars as fast as they can. During a deflation the dollar becomes inherently more valuable, it seems to me. By definition, in a deflation each dollar buys more goods and services. Unless that is happening in other currencies at a faster rate, the dollar should stay strong while U.S. deflation is happening. The deflation has begun as we are now experiencing asset deflation in stocks and housing. We are also seeing deflation in commodity prices. The final stage is deflation in the prices of goods and services, which we could see in 2009. In that environment, people will not be trying to get rid of their dollars; rather they will want to hold onto their dollars. So I would expect that such a trend would also tend to depress the price of oil as expressed in dollars. Similarly gold should be headed lower before it starts its next bull move, probably to record breaking ground.
For all of these reasons I now expect that by year end we will see oil priced below $70. It may have a short term move up due perhaps to technical forces of the market being oversold by speculators recently. But once weak shorts have covered - perhaps with the announcement of a cutback by OPEC - I expect oil prices to begin heading back down.
I doubt that an oil price much under $70 will be an equilibrium price - one that can stand for many months - because it will cause supply destruction based on higher marginal production costs. But in the short term oil can stay down there or even go into the $50’s as some major firms are now predicting.
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This article has 26 comments:
In regards to point #3, I don't think the federal government will let Ford and GM go under. They will rescue them just as they did with Chrysler in the early 1980's and with the financial institutions recently.
It would be political suicide for the president and other elected officials to let these industrial flagships that employee millions of people directly and indirectly die and have the entire US auto market taken over by foreign auto makers.
The method used by the Congress in order to get their "pork" approved and signed by the president is that they take s necessary bill and add their pork, thereby extorting the president into signing. It is hard for me to understand that writers have no clue that the president can't spend a nickle without Congress. That is high school civics. The President of the United States cannot enact legislation.
As the president doesn't have the Line Item Veto, as most Governors do, he is stuck between the proverbial rock and a hard place. A beginning of the process to rectify this problem would be to give the president the Line Item Veto, pass a Balanced Budget Amendment and have Term Limits on Congress. This worked well during the "Contract With America" in 1995 which resulted in the nominal social security combined budget balanced. Unfortunately, the Congressional Republicans, like other parasitic politicians, did not stick with its principle once they got into office and fell in love with unearned, undeserved power.
Why did the non-Bush economy at Dow 14000 become the Bush economy at 8000? Last year it was the Bush-Iraq War and now that we are winning it is on page 27 of the NYT. Media hypocrisy is nauseating and counter-productive.
Neither Iraq or the derivative catastrophe, a concern of many of us before Enron and LTCM, could have come about without Congress enacting legislation. Now we have Democratic Socialism which Obama will attempt to turn into just plain old Socialism and his fellow travelers in Congress will be his co-conspirators.
I can imagine what out Military, Supreme Court, Justice System, et al , will look like under an Obama Administration in concert with Socialists like Pelosi and Reid. I shudder.
Hopefully, the 2010 Congressional Elections will bring a modicum of rationality to the voters after they see the results of the Statist Socialists make their moves. If they don't they deserve what they gets.
It is not too bad to be an old man in this disrespectful, greedy, vulgar culture that degrades those of us who spent years fighting for our country's values. Nobel Peace Prizes have been given to Arafat, Carter, Scholes & Merton of LTCM fame and now Krugman of Enron fame. Utterly ridiculous and absurd. It should be renamed the "Noble Losers Award".
Lawrence...
PS: Oil and Gas are Utilities not to be manipulated!!!!
Hopefully President Obama will recognise this and reverse all the harmfull practices of the RNC over the last 8 years
There is an argument that the progressive tax is a form of wealth redistribution, but let's put this in perspective here. Real socialism is state ownership of production, and that's not something either candidate has proposed, although it has indeed suddenly happened in this crisis.
The only real Socialist states left are Cuba and the resurgence in South America, but these states have nothing enviable about them. Only China, with its essentially market-socialism, where-by only the macro-factors of the economy are controlled and small-scale transactions occur in essentially a free market place.
This is not land redistribution. This is not taking someone's company and nationalizing it (well....except when they are 'too big to fail'). Consider this: even after the GW.Bush tax cuts, the top rate was still higher than it was in 1991. Does that make W. a socialist? Consider from 1988 to 1991 the top rate increased under HW.Bush. Did that make him a socialist?
Arguing that relatively small adjustments upward to the progressive tax system applied in a non-uniform way is equivalent to socialism is a position that's hardly tenable given that virtually every administration had done this in some way, shape, or form in the various complexities of the tax code.
Why bring politics into it? Whatever failed policies, regardless of what president was in office, have been passed by Congress just lends further credence to the argument that government should be relatively small and has its place, but only as a watchdog, defender against enemies and building/maintaining infrastructure, but not to promote social policies that nearly always fail, i.e., Subprime mortgages. You might study up on who started that mess and see if your political bias really justifies publication. Try any engine search and see how President Clinton initially began that program. Other Democrats, including many in the news today, kept the fuse lit for the past eight years by supporting Mae and Mac. Isn't it ironic how that situation just happened to be the straw that broke the camel's back and caused the government encouraged Wall St. house of cards to fall? Anyway, as far as the price of oil, your point is well taken, for the near future, it's in OPEC's hands, but we better be looking for alternatives during this period in history, including domestic production, or we're going to be up a creek without a paddle one of these days.
This deflation vs inflation is a real conundrum isnt it? Housing wont come back for a LONG time, and still has much unravelling to do, so that's a fundamentally deflationist influence, and yet we're entering a period of payback for the worst debt accrual in US history on multiple levels with a hungry demographic assaulting Social Security. That is to its bones inflationary. How will these two essentially contradictory forces resolve in battle? Tune in to find out....
Bush had veto power over the spending--------but did nothing, nothing !
Bush could have forced the 60,000 man security force at USA airports gone to the private side but NNNNNNNoooooo he capitulated and hired them on as Government Security..
Bush was a yes-man-no hassles with Congress
UNLIKE
Ronald Reagan
Bush turned Iraq into Vietnam in the desert by not declaring our intent was to depose Sadam then get out. Iragq really became a WAR about OIL.
Blow 1.7 trillion there !
Bush gave us NO Energy policy --so last year 700 Billion US dollars went overseas for oil -
Colin Powell --went over to the Democrats because the Republicans sadly became VACANT of LOGIC
Paul Volker (REAGANS FED CHIEF) in the 80's supports Obama--is he daft ???
No, Republicans sadly, have become clueless.
However it happened, WE have gotten OURSELVES into this sorry state of affairs. UNLESS and UNTIL we find a way to pull this country TOGETHER, we will continue to reap the rewards we so richly deserve.
Since we have no common military foe to bind us, we've taken to fighting each other. Maybe the only answer is a severe economic slowdown (read "Depression") to awaken us to our plight.
Or perhaps we'll decide to just keep on tearing each other down instead.
1. The dollar has been flooded into international markets and are not going to be withdrawn from the global markes any time soon. This is why the sentiment is bullish for oil. First -the fact that this will ultimately lead to inflationary pressure on the dollar and hence further depreciation.
2. The dollar is the 'reserve' currency of the world mainly because of the oil trade. So - with so many more dollars in the marketplace - the price of oil must rise -not only due to depreciation of the dollar but also the overwhelming need BY the US -to prevent a stream of dollars returninng to the shores of the US causing possible hyperinflation. The easiest way to prevent this is by raising the price of oil -so that the central banks of BRIC countries (all having large US dollar supluses) are forced to keep their dollar reserves instead of dumping them back into the market. This allows the US to maintain low inflation at home and continue to print money.
This 'tie' to the oil trade is what allows the US to print virtually unlimited amounts of dollars as - a substantial portion of this 'excess' money is sequestered in central banks in order to pay for oil.
For example take China -as an example with close to 2 trillion US dollars. IF they required 2005 levels of oil (due to recession )= 6.5M bbl/day at say $60 per barrel then = $390,000,000 * 365 = $142,350,000,000 = 142 billion dollars a year. That leave them more than adequate funds to dump in the market. However do the same calaculations for say $150 dollars a barrel and it becomes $355,875,000,000 billion a year. Which means that if China keeps say a three year biffer for oil -half oof their surplus must be devoted for oil and therefore they can not dump their dollar assets regardless of theplummeting value of the dollar. Multiply this effect across the Gulf states, Japan and germany - America's primary lenders and you can see why the US -can with impunity print money at will- - as long as the price of oil is high.
The US need never repay its debt - per se - as the increasing price of oil forces more and more creditor nations to hold onto a larger and larger portion of their dollar reserves -which precludes them from dumping their excess dollars on the market. With out the high price of the oil - Japan, Germany, China -which hold close to 3.6 trillion of US debt -can and would dump their dollars.
As for the Gulf states - as they are all kleptocratic dictatorships dependent on the US - they can at any point -evaporate a substantial part of the US debt - as the price to stay in power indefintiely -(Saudi, Qatar, UAE).
However- the pressure comes from Iran/Russia and Venezuela- hence this is why all these countries face relentless media pressure as being 'evil'. As they have all moved away from the dollar peg - thereby - causing significant increase in extra dollars returning to the US -hence the rising inflation seen in the US recently.
Ultimately - the US will inflate it's way out of debt. The entire world runs by the same inflationary fiat system and have willingly conspired to inflate their way out debts. It is no coincidence that all the developed countries (Italy/France/England etc) have huge deficits and all the colonial bastions (Brazil/China/India) have surpluses.
Ultimately it was a charade- as these countries are producers being repaid in paper f declining value -while the western countries recieve goods and services.
This system will be maintained - as the developing cpuntries will continue to chase the paper profits (literally) and they have also inflated their own currencies to be competitive. So after the concerted global fight to prevent deflation - there shall be a period of inflation. There is no way out .
Iran wants a Cut of 2 million at least, Russia want to become an Opec Member, Opec wants Russia to cut output in sync with opec as a sign of good faith.
Meanwhile, Russia,Iran and Qatar, the biggest Nat.Gas exporters want to for a Mini Opec to cut NG exports.
Yes indeedy, a Conspiracy dream but not by big Oil.
Simply unqualified to be President of the USA. Period.
2. govt bailout of C of the 80's was necessary because C built tanks for the u.s army & the army must have their tanks. F and GM today do not have that feature.
> jack
If I may sum it up, while we are having increasing difficulty postponing it, this is very likely going to result in a BAD END one day.
We can do without everything except air, water, food and beer - yes, we can even do without sports and shopping. I think I will take this economic disaster as an opportunity to refocus my family on what we actually needs vs. what we think we need. Lots of wealth and owning things is rarely the real key to happiness, granted it can be at least temporarily, even if the lack of it is usually a primary cause for unhappiness. Suck it up and chill out till things improve.
A European socialist country like Sweden, somebody said. Hmm, I haven't seen any socialism around here for the last two decades. And before I forget, I was informed the other day that Arab money was backing Obama. Funny, but I lived in the US when people - at least the people that I worked and talked with - prided themselves on trying to get things right. Now it seems that almost everything has been turned into a facsimile of those mid-day soap operas that are so popular.
I'll throw into the discussion one other scenario that hasn't received much, if any, discussion. What if the U.S. Government, looking at the $10+trillion national debt, and with the Baby Boomer's greatly increased Social Security benefits looming, defaults on its obligations? Unlike with Mexico twenty years ago, there won't be any 'super economy' to bail out the U.S. In my reading, over the past few weeks I'm seeing more and more tiny hints that something huge is coming in relation to the monetary system. It could be described as a tectonic shift.
One possibility is a U.S. default on its national debt, along with the creation of a new currency to serve world trade. Such a default could be whole or partial. Would China accept, for example, accept a partial default in exchange for making the Yuan a major part of the new world currency? The G-7 countries are said to be discussing a world currency that would replace the dollar in trade. This past weekend Joe Biden said that in the first few months of an Obama administrations there would be a huge test, and then went on to say that what Obama's solution would be would seem wrong at the start, but that his listeners should stick with them. Everybody seems to be thinking such a test might be a terrorist attack. It could just as easily be a U.S. Government default on its financial obligations.
At any rate, I thought I'd throw into the discussion an 'unthinkable' event that could also affect the price of oil . . . and of gold.
The Arabs alone hold $2.5 Trillion, Add China with 1.8 Trillion, even poor Russia with $500 Billion, hmmm
Its starting to sound like Big bucks. Don't get any of them mad. The current financial crisis would suffer a CRISIS if the idiots in Congress decided to try to pressure any of them.
Before any of you zealots start hopping up and down with joy, remember that Bush's approval rating is absolutely wonderful when Compared to that of Congress. Who controls both Senate and House? Change, Change, Change. Be careful of what you wish for.
I think we have, as a country, concluded that we can't stand another 8 years of a republican administration and thankfully, Obama IS a very intelligent individual.
I believe that he has vision and the ability to see what is working and what is not and though there will be no quick and simple solutions to the mess we are in, he has the intelligence and strength to abandon that which is not working and will keep trying until we get back to positive growth and stability.
I read an excellent article lately about FDR's ability to keep trying different policies until progress was made and that is what made the difference in turning around the economy during the depression. World War II was a key factor in building on that turnaround.
I believe our WWII is Peak oil and that moving this country beyond oil will require an equal effort to preserve some vestige of our quality of life.
With the current "occupant" of the white House having no more leadership, nor analytical skills, or, public confidence, than that of a potted plant; I welcome the change. I still have some faith left in our innate ability to pull together and fix what's wrong with this country.
I think the public has recognized the intelligence and far sightedness of Obama and believe that their support will have a beneficial effect that will enable the next president to rally support for what will undoubtedly be a painful, though healthy, transition to reality, instead of the status quo.
I did not intend this to be a campaign statement for Obama, but feel that a leader with intelligence and vision is a huge first step towards fixing whats wrong with our system.
May he have the strength to change what's not working.
I agree - Obama is intelligent - certainly politically if not realistically. He sure seems to have fooled most of the people up until now. As far as cutting taxes for 95% of the people - something like 38% don't pay any now and in fact get money from the IRS. Wealthy people didn't get that way by being stupid except for those that inherited it - like the Kennedys.
anti-redistribution of wealth voters are the ones to whom the wealth will probably be distributed. We are seeing a mass of contradictions in this particular silly season.
campaign-by-slogan to fool the lumpenproletariat is what the GOP (greedy oil party) is good at.
> jack