Oil: More Demand, Higher Prices
An expert says the market for oil is growing, while the power of the dollar will shrink.
After the price of a barrel of oil hit a new high last week (almost $105), President Bush asked the Organization of the Petroleum Exporting Countries (OPEC) to increase production to drive prices down. Instead OPEC officials said they'd maintain current output levels, a move that could lead to prolonged economic sluggishness for the United States. The cartel's denial looked like political bickering between oil-rich countries—like Saudi Arabia, Kuwait and Nigeria—and their biggest consumer: the United States, which cartel members blamed for economic mismanagement of the resource. But some analysts say that output may not be so easy to increase, even if the producers wanted to. NEWSWEEK's Daniel Stone spoke with J. Robinson West, chairman of global consulting firm PFC Energy, on where the global oil market might be headed. Excerpts:
How political is it for the cartel to reject America's request to raise oil production?
Frankly, this is not the first time that the U.S. has asked OPEC to move, and it's not the first time they've been rejected. So I don't think that's a big deal, and I would have been amazed if they had responded. The U.S. consumer and the president are very concerned. From the standpoint of the OPEC producers and the markets it's a very different situation, and some of these countries, notably Iran and Venezuela, need oil at very high prices in order to finance their economy.
But don't these countries have an incentive for the world's largest consumer to avoid a recession?
Well, first of all, there is enormous worldwide demand. And demand in the United States has remained very high. The politicians in the U.S. always make efforts to increase supply. They do next to nothing about demand. Secondly, demand is growing very rapidly in Asia and the Middle East, so you have got demand factors, some of which are beyond the control of American politicians, and others certainly beyond the control of OPEC officials.
Talking about Asia, what role will a rising consumer continent play in the global oil market?
They're transforming the market. There is analysis that shows a very high correlation between the per capita GDP and car ownership. Per capita GDP in China is still quite low, and car ownership is low. But as per capita income grows, car ownership will grow. This has happened in Korea, the Netherlands and Brazil. It happens everywhere, and as you move up that curve it's inevitable. If you believe the Chinese economy is going to grow—and I believe the Chinese economy must grow—then automobile demand and ownership must grow. If you look at Ratan Tata, a leading Indian tycoon and industrialist, he has introduced the Nano, a new [gas-powered] car that will cost $2,500. He'll bring the automobile to the general public. And if he does that, demand is going to go up.
Will the market be able to meet that demand?
There's very little spare capacity in the world. Most of it is in Saudi Arabia, and most of that is heavy oil. You also have places like Nigeria, where there's a risk built into the market. But another factor is driving the price of oil: a lot of traders are basically shorting the dollar. They believe the dollar is going to go down, so they're buying oil. And that has the effect of pushing the dollar down and pushing the price of oil up even more. Oil has become a financial instrument beyond just the energy markets.
The value of oil is constantly changing, lately reaching new highs with every fluctuation. Everyone wants to know how high could it go.
Well, there are a lot of people that believe that with a U.S. recession the price of oil would soften as the economy softens. But one of the things challenging that right now is this "financialization" of oil that's being used as a hedge against the dollar.
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Member Comments
Posted By: sirhc @ 04/05/2008 7:43:48 PM
Comment: THE TRUTH OF THE MATTER IS THAT CLIMATE CHANGE IS VERY REAL. I TRIED TO DENY IT BUT WHEN YOU HAVE AL SHARPTON MAKING COMMERCIALS WITH PAT ROBERTSON AND NEWT GINGRINCH DOING COMMERCIALS WITH ANNCY PELOSI ALL FOR THIS-THEN THAT'S A LOUD AND CLEAR SIGNAL. Go to www.dakshidin.com for the environment uptick on other energy source(mainly air and wind-I saw on Glen Beck about the air powered car-HOPE SO!)and www.greenglobeint.com for the companies that specialize in tourism and traveling in the most green way because traveling is very, very much a pollutant as people discard and tarvel more frivilous than when they are home.
Posted By: david-fahey @ 03/19/2008 12:25:40 PM
Comment: question. with the present falling dollar, what would be the cost of a bbl. of oil today in, let's say, 1999 dollars? the ones bush found in the bank when he became prez. bush says he was an effective manager of the economy what do you say?
Posted By: Nins @ 03/13/2008 9:26:23 PM
Comment: A blogger named Edson writes "Did the word Democrat really come from democracy?"
Here is a derivation of the words "Democrat" and "Republican."
The United States of America is a republic, that is to say, a Federal government in which the people are represented by elected officials from the various states. Before we were a republic, we were a democracy made up of 13 individual states that were not united. A democracy is a form of government where the individual citizens have the right to speak their minds and influence the political discourse. Democracy was named after Demosthenes, a citizen of ancient Greece with a speech impediment who practiced talking with his mouth full of pebbles to overcome his disability. Demosthenes later became a great political orator. This is where the Democrats derive their name.
The original Republicans were in favor of the states joining to form a republic (which is how that party got it's name). The original Democrats were opposed to this idea, they represented the individual states and were worried that the republic could gain too much power over the states, and through the exercise of tyranny, deny individuals their freedom. Trust me, people were pretty passionate about their liberty in those days, having just fought for independence from England. The Declaration of Independence, the Federalist Papers, the Constitution and the Bill of Rights were all hammered out by serious-minded men who sought to balance the need for individual freedom with our shared common cause, the needs for united strength and social order. Balancing the rights of the individual against the rights of the whole society is what America is all about. This is not only a great achievement for our nation, it is one of the greatest achievements of mankind. And we have, by and large, been true to our ideals over the past 227 years. The system of government we initially established, although needing occasional revisions, has stood the test of time.
Let's not forget where we started from, that impulse towards equality and freedom.
America is, with all it's faults, a meritocracy. Most of our founding fathers would never have had a voice in the 18th century English government they rebelled against, a monarchy where you had to be born into power. In America it was different. If you had intelligence, passion, ambition, drive, talent and a little luck, you could change the world.
This is the real secret to Obama's popularity, his ability to touch this archetype in our souls. This is why a white, conservative middle-aged female Republican like me wants to vote for him. He's got that blend of intelligence, passion, ambition, drive and talent. I'm giving him my vote to proffer him the last ingredient, a little luck, so I can watch our Republican Democracy in action, and once again change the world.
IN GOD WE TRUST