Political Incompetence Could Drive Up the Price of Oil

Oil prices are ascending in concert with a rising stock market and an expanding sense of non-pessimism about the global economy, yet the supply of cheap oil remains far greater than demand. Huge amounts of $5 cost oil is being moth-balled by OPEC and there is no shortage of oil inventory above ground, much of it floating at sea. So the fundamentals of near term oil supply and demand imply lower prices but they are being overpowered by speculators who want to own oil as an investment category.

There are, however, some “green shoots” of real oil shortage. Iraq and Nigeria are both looking dicey. In Iraq security operations for the oil exporting infrastructure will soon be handed over from the U.S. to Iraq, putting them at increased risk. Meanwhile terrorism is increasing on the ground as the “surge” tactics of enlisting Sunni support are being abandoned by the Shiite government. More recently the Kurds announced they are planning to begin exporting oil without Federal permission, not a tactic likely to be accepted peacefully. In Nigeria there are new protests against the government for rigging the last election and for widespread corruption.

Nobody can know if or when oil exports from Iraq and/or Nigeria will begin declining due to these political problems. But in Venezuela it is clear that the time has come when its declining oil production (off 8% y/y) is likely to decline much more rapidly. Pres. Chavez is seizing hundreds of millions of dollars of foreign oil production equipment belonging to contractors who have not been paid and who therefore are withdrawing from their assignments in Venezuela. There’s little question that Venezuela’s state oil company will be unable to keep the flow from declining further without the help of western contractors whom Pres. Chavez has now cheated out of their wages and taken over their assets to boot - as though it were the corporations who are to blame.

Iraq, Nigeria, and Venezuela are three vital oil exporting nations. Problems in those countries stemming from political incompetence could well cause a decline in OPEC output well beyond what is planned by OPEC. If so, the day when a fundamental reason for higher oil prices may come more quickly than is otherwise expected.

All this worth keeping in mind as we observe the oil market - even though it has had little impact to date and may or may not have a great deal of impact for some time. The immediate cause of higher prices now is speculation, pure and simple. Speculation, unlike fundamental supply and demand forces, can turn on a dime, so I would not characterize the current oil price rally as having much predictive power.

Comments

[Prudent Man...:]

The "will" is a given. The only question remaining is the "when".

May 10 12:56 PM

[icandoitdon:]

oil is the new gold, chased by fearful investors who do not trust governments to manage their economies or world affairs responsibly. given the history of the last 10 years or so, who can blame them?

May 10 01:03 PM

[Sober Realist:]

What will really put a dent in oil consumption will be this new technology which could also lead to perpetual motion vehicles:
zeropollutionmotors.us...

May 10 01:18 PM

[Missing_Link:]

Your comment had me confused for a moment until I realized you were being facetious.

Well played, sir; well played!

On May 10 01:18 PM Sober Realist wrote:

> What will really put a dent in oil consumption will be this new technology
> which could also lead to perpetual motion vehicles:
> zeropollutionmotors.us...
>

May 10 03:20 PM

[Missing_Link:]

LOL ... OK, I followed the link, and 2:48 on had me falling off my chair laughing.

"... which presents a tantalizing possibility. What if that generator was onboard the car? Then one day, perhaps the compressed air that runs the cars, will also run a generator to compress its own air.

"A car that runs on air ... and constantly refuels itself. Round and round ... a perfect circle ... perpetual motion. A no-cost fill-up, EVER. And not one iota of pollutants, EVER. And a cute car."

HAAAAAAAAAAAAAAHAHAHAH...

I'm going to buy one of these for Cetin so he'll have a perpetual-motion machine to ride all the way to the top of his unstoppable market rally.

May 10 03:29 PM

[Jasper M:]

I had thought oil might peak this summer above $70/barrel. Not so sure about that now. And the cavernous downside makes the risk/reward not worth it. Most petro consumption is industrial; a depression will eliminate most consumption, while keeping producers
sufficiently desperate for revenue to keep the pumps running.

Missing - that would be a Lovely, and appropriate present.

May 10 08:32 PM

[Tricky:]

Why did your headline use the word "could"? ;-)

May 10 09:11 PM

[Sober Realist:]

You can laugh all you want, but I've seen the future car myself and it's a disruptive technology. A documentary is now being done on this new car technology:

"Imagine if someone was next to Henry Ford, filming while he was making the Model T and starting to create a whole industry," said Vencat.

"That's a very interesting document for future generations.This movie will come down in history as a major piece, documenting the death of one industry and the rebirth of another."

The thing is, he's not exaggerating.

Vencat, who lives on the upper East Side, is spokesman and CEO for Zero Pollution Motors Inc. The New Paltz-based company is the American arm of the French firm Motor Development International, creators of the AIRpod, a car that runs on compressed air."


Read more: "Filmmaker Roy Szuper's new focus is a car that uses air for fuel" -
www.nydailynews.com/ny...




On May 10 03:29 PM Missing_Link wrote:

> LOL ... OK, I followed the link, and 2:48 on had me falling off
> my chair laughing.
>
> "... which presents a tantalizing possibility. What if that generator
> was onboard the car? Then one day, perhaps the compressed air that
> runs the cars, will also run a generator to compress its own air.
>
>
> "A car that runs on air ... and constantly refuels itself. Round
> and round ... a perfect circle ... perpetual motion. A no-cost
> fill-up, EVER. And not one iota of pollutants, EVER. And a cute
> car."
>
> HAAAAAAAAAAAAAAHAHAHAH...
>
> I'm going to buy one of these for Cetin so he'll have a perpetual-motion
> machine to ride all the way to the top of his unstoppable market
> rally.

May 10 09:13 PM

[Steve Hughes:]

Venezuela is an interesting situation; I mean petro resourcewise, not politically. They are currently in a decline as their aging fields run out. Since they ran the US and EU bigs off, they have some new deals in the works with China. However, it isn't clear if China is simply going to buy crude or joint venture with VZ in E&P. The Orinoco Delta sure looks juicy.

May 10 10:42 PM

[BobP:]

"The immediate cause of higher prices now is speculation, pure and simple."

These kinds of comments are a dime a dozen. Hardly meaningful. Care to identify the speculators? Dare to tell us that the banks and their low margins are behind these speculators? Probably not.

May 11 08:53 AM

[Ferdinand E...:]

Another excellent article by Jim Kingsdale.

The suggestion that the present price of oil is due to speculation didn't sit to well with my good self, but then I remembered that Mr Kingdale did not buy the earlier blather about speculation rather than fundamentals sending the oil price in the direction of $147/b, and I did some thinking.

Yes, speculation could well be the reason for the present increase in the price of oil, but unfortunately I am too busy to take a careful look at what is happening on the OPEC front. As far as I am concerned, those gentlemen have finally decided to do what I would do if I were in their place, which is to very carefully 'manage' the oil price. I'd love to go into this, but an ignoramus has challenged me to a debate on nuclear energy, and I have to make sure that he gets his lumps.

May 11 10:05 AM

[Jimbo:]

Sober Realist: Like many other readers, I went on the site for the "air car". It would seem logical that some form of energy is necessary to compress the air. The film clip did not seem to explain this to my satisfaction. I am a charter subscriber to the theory that there is no free lunch.

May 11 10:40 AM

[SteveB/Colo...:]

Regarding "green shoots" of demand, Mexico is also in production decline. Too much petro profits siphoned off for social programs and also likely due to corruption; not enough profit being reinvested in infrastructure.

Is the air car an updated version of cold fusion? One must wonder.

May 11 10:50 AM

[Spicer:]

Political competetence is keeping the price of O down or is at least slowing its rise. The Obama gang is doing their darnest not to stir up trouble with the Russians, Iranians and Chavez, thus the geo-political premium in the oil price is at its lowest in years.

And the Kurd's actually have an export permission from Baghdad:
online.wsj.com/article...

May 11 01:04 PM