Global Oil Pricing: As the World Turns

Apr. 5.10 | About: The United (USO)

The March issue of Monthly, As The World Turns, has now been published. In this report I mark the now completed process whereby the United States lost the ability to control the price of oil, via the power of its own demand (click to enlarge).

The controlling factor now in global oil prices are the five billion people in the developing world. They use less oil per capita and derive more utility from each barrel. Which is a good thing, as the global supply of oil is now unable to make a sustained response to higher prices. Of course, in the West, we have come up with all sorts of weak explanations to explain our loss. The loss simply unfolded over the past decade, as global oil supply finally ran into geological constraints. It’s not because of speculation. It’s not because of price fixing. And it’s not because of any newfangled theory such as “Peak Demand.” From my March newsletter:

Peak Demand theory paints a child-like portrait of a large and powerful kingdom happily choosing at its own convenience to transition away from oil, to renewable energy resources. But no such smooth transition is in the offing, as we now understand. For, here in 2010 in the aftermath of a burst credit bubble, the United States and the rest of the OECD are not on the threshold of an energy crisis but remain very much in the middle of one. Front month oil, as we go to press, closed at $83.50 per barrel to finish out the first quarter, of 2010. Meanwhile, recent data on Housing, Employment, Wages, Savings, Foreclosures, Commercial Real Estate–and the European banking system–are hardly encouraging. The same class of post-war analysts who failed to predict oil’s entry into a new pricing era circa 2004 (and who are still in denial) have gone silent as expensive oil now unfolds over very weak Western economies.

The five billion people in the developing world know nothing about Peak Demand theory, or other such myths from oil-consultant hatcheries in America. The price of oil does not move to the drumbeat of US demand, and will not wait for us to prepare, or “get ready” for higher prices. Many still believe in some extra reservoir of oil supply that will come to our rescue. I look at the chart, and wonder why.

Graphic: Global Crude Oil Supply 2004-2010 (data through January 2009), with a still shot from Andy Warhol’s Empire used as background.