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Oil Debate: Speculators Are Only Partially To Blame

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Oil Debate: Speculators Are Only Partially To Blame

Friday, 29 August 2008

Rick Pendergraft
Despite stating what I thought was a pretty good case for the relationship between oil and the dollar in my article on Monday, I still heard from a naysayer.
                   You know that the speculators are controlling over 70% of the increase in oil prices. Why do you continue to blame the dollar? It is just a new reason other than "a true oil shortage." You and I both know there is NO oil shortage at this time in the world.

                Why don't you speak the real truth? Another scammer you are to the public.

                Cheers,
                Judith R.
                Madison NJ

I love how Judith calls me a scammer and then closes with “cheers”. Well Judith if a picture is worth a thousand words, two pictures are worth two thousand words. So I give you the weekly charts of oil and the dollar with their respective regression channels since the beginning of 2007.

I won’t argue that speculators are partially to blame, but come on, you can’t say that a weak dollar hasn’t played a role, along with our appetite for gas guzzling SUVs.

The term “perfect storm” is used way too much in our industry, but that does seem to be the perfect description of what has happened to oil in the last few years.

Moving on to another email I received regarding oil, this gentleman asks about global demand and the “developing countries”.

    Dear Rick,

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    What do think about the demand increase in oil from China, India, and other developing countries over the next few years? They are not the same countries as they were in the 80's. On the supply side, what is the growth rate of oil in the next few years. I know the U.S oil production is declining, same for U.K. and Mexico....
    Your argument is not convincing to me.

    Regards,
    James

Well James, you are right that China and India are not the same countries they were in the ‘80s. Each of them have over a billion people living within their borders and they are growing at a much faster pace than the U.S.

According to the CIA World Factbook, China is a heavy exporter with almost 37 percent of their GDP being exported. Guess who is their number one exporting partner? That’s right the U.S. Almost 20 percent of China’s exports make their way to American shores.

India doesn’t export nearly as much as China, but exports still represent nearly 15 percent of the GDP. Care to take a guess as to who their number one exporting partner is? If you said the U.S., you are correct. Over 15 percent of India’s exports wind up in the U.S., and another eight percent go to China.

My point is this, yes, China and India have huge growing economies, and there is no disputing that. However, both India and China rely heavily on exporting products to the U.S. If our economy continues to slow over the next few years, both India and China will slow down as well. They might not actually see a contraction in their GDP, but they won’t be able to maintain double-digit growth if the demand for their exports fall and if oil continues to climb.

A combination of lower demand and new alternatives for oil will cause the demand curve to shift to the left as I wrote in my piece on Monday. It looks very much like what we saw in the ‘80s, regardless of the fact that India and China are different than they were then.

Rick

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