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Stock Ideas Investors Daily Edge Record Oil Prices IMF, OPEC, and U.S. Congress are on the same side
Stock Ideas Investors Daily Edge Record Oil Prices IMF, OPEC, and U.S. Congress are on the same side 
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| Speaking at the annual general meting of ultra Tech Cement in Mumbai on Friday, Mr. Birla said “Enthused by the performance of industries during a last year and half and projected demand growth, additional capacities around 90 million tones have been announced. | |
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| Record Oil Prices IMF, OPEC, and U.S. Congress are on the same side |
| Tuesday, 22 July 2008 | |||||||||
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Why the heck would Congress want to jump into bed with OPEC? I’m not out to demonize OPEC. I understand that OPEC isn’t a military grouping like NATO. As oil-exporting countries, they grouped together to defend and advance their economic interests. Its mission isn’t to bring down the West. It simply wants to extract the best price from Western buyers for its oil – short of killing demand, that is. Its dream market? One in which oil demand and supply is in constant balance with a tight lid on excess capacity and inventories – lest they lead to rumors or the actuality of oversupply. The game OPEC plays isn’t easy... When supply gets too tight, it ups production by a few hundred thousand barrels a day. Prices ease up and the West is happy. And when prices drop too much, they reign in the oil spigot – and prices hopefully get a boost. It’s a fine balancing act, which never works out in the real world. In that world, oil is either overflowing or drying up. When oil was under $40 five years ago, OPEC wasn’t happy. Now that it’s well over $100, the West is up in arms. Yes, it’s your classic boom-and-bust industry. That’s why Congress is usually laughing when OPEC is crying and vice versa. Congress never agrees with OPEC ... until now. How’s this for a sign of the apocalypse -- the IMF, OPEC, and U.S. Congress are on the same side of an issue. What is so obvious that all three of these disparate organizations can nod their head in unison? They all say that speculators have contributed to the soaring price of crude. I wonder what they were thinking last Friday when the price of crude fell under $130? Just the week before it was touching highs of over $147. Did the fundamentals change that much? Yes, crude and gasoline inventories went up last week in the U.S. when they were expected to go down.
Yes, Big Ben sounded particularly gloomy when describing the economy to Congress. Yes, China reported that its second quarter economic growth (compared to last year’s second quarter) at 10.2 percent. It was slower than the 10.6 percent reported in the first quarter of this year. Yes, Chevron was reporting that their “Bonnie Light” crude was back in production – after a pipeline was knocked out the month before. A veritable cascade of good news, right? No wonder the price of oil fell! But in the end it’s all white noise. The fundamentals didn’t change at all. Crude production is still on the losing end of keeping up with demand. Of all the above tidbits, the one that spooked the market the most was China’s growth losing a bit of steam. It got the most attention because it perfectly fit the story of the week: GLOBAL GROWTH AT RISK. This isn’t the first time we’ve heard about other countries in the world slowing down. For example, here’s a headline taken from a pre-Memorial Day article: “A new spike in prices raises fears for the world economy...” “This year American drivers face something else that may remind them of the failure thus far to bring order to Iraq: close to record prices for fuel.... “But the problems of the occupation in Iraq play only a minor role in the story of oil's rise. Stockbuilding, including by the US government's strategic petroleum reserve, and speculation linked to fears of further supply disruption in the Middle East are secondary factors. Buoyant global demand, in a year that is set to be the best for the world economy since the boom of 2000, is the prime cause... “The question is whether that economic recovery is about to run out of fuel. In the past three decades, whenever oil prices have risen sharply a downturn in the world economy has followed... “The oil price has prompted a number of airlines, including American, British Airways, Qantas and SAS, to add extra charges to some fares. It has already made some Americans reconsider their infatuation with their gas-guzzling SUVs... “President George W. Bush has described the oil price as "an issue of deep concern". He has been talking to the leaders of the Organisation of Petroleum Exporting Countries in an attempt to persuade them that its current levels are excessive... Discomfort over fuel prices has prompted some change in how people use vehicles. Christine Feuell, SUV group marketing manager at Ford, says: "We've noticed that people are using car pools more, and taking shuttles to work." This article was written in early May. Since early May, the price of oil has risen from just over $110 to over $145 (before falling back to around $130 last week). If prices were affecting U.S. and global growth and how we use oil in May, it must be even worse now, right? Let’s go back in time even further. Back in early May 2004, the price of oil was $41. And that was when this Financial Times article was written: on May 17, 2004. It seems that what we’re hearing from the financial media hasn’t changed much in four years. You can look at this in two ways. You can decry the four years we let go by without doing anything about “close to record prices.” To say we’ve lacked an effective energy policy is to suggest we’ve had one. We haven’t. The second way to look at high oil prices is to consider that history could be repeating itself. High prices didn’t kill global growth then or hurl the U.S. economy into recession ... why should it now? Maybe Bush’s complacency about energy was spot-on. We have more than merely survived high prices in the past four years. Until this year, we have flourished. But I find that hard to swallow. The idea of paying $200 for a barrel of crude is truly nauseating. Surely this time things are different. How can we not be on the precipice of real significant change this time? Listen, I’m not advocating energy complacency. It’s absolutely ridiculous that we have to spend more than $700 billion a year on oil imports. We used to produce most of the oil we used. Now we rely on other countries for 72 percent of the oil we use. And the next shoe to drop? OPEC now supplies 40 percent of the world’s oil. In less than ten years it’ll be over 50 percent. Energy independence? We’re not exactly going in the right direction, are we? Are high prices here to stay? Are things really different from 2004 – the possibility of $50 oil was to us back then what $200 crude is to us now? I’ll answer these and other questions next week when I discuss what the future holds for oil prices. Invest well, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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