Thursday, 15 May 2008

Oil at $200 a barrel?

I just looked at the price of oil. A barrel of Brent crude currently costs $122. So far this year, the price has jumped $31 dollars - an increase of 34 percent.

There has been some discussion of prices reaching $200. I thought it would be interesting to ask a slightly different question. What monthly rate of growth would be needed in order for the price to reach that lofty figure by the end of this year. The answer is 7.3 percent. The average monthly growth rate for the year so far has been about 6.7 percent.

Could oil reach $200 by the end of the year? It will if it keeps on increasing at the current monthly rate. Or perhaps the oil price, along with other commodities, is the last great bubble, and it is just ripe for bursting.


aSteve said...

You'd need iron-clad cahones to speculate in the oil market at the moment. I imagine the price rising further - how much, I'm not sure... but with every little stretch, in my opinion, the risk of a collapse in price becomes more plausible.

It is important to note that various players, for the first time in history, as far as I'm aware, have been building large crude reserves. Greenspan alludes to this having been a major influence in driving the price up. Of course, building a large stockpile has three interesting effects. 1. It drives up the price in the short term. 2. It drives down the bargaining power of OPECs. 3. It leads to increased capacity planning by OPECs.

If demand for oil fails, the price could easily plummet... rather like in leveraged markets... as stock-pilers release their reserves onto the market in a rush to secure a good price.

Many will be fooled by fuel prices... fuel supply is primarily constrained by refinery capacity rather than crude delivery.

VADO said...

suddenly, $200 a barrel doesn't seen so far away.

Anonymous said...

asteve: "Greenspan alludes to this having been a major influence in driving the price up."

The thing about Greenspan is, he is desperate to find a reason other than his own actions over the period of his tenure at the Fed that he can plausably blame for this situation.

Three words: Greenspan did it.

The US strategic oil reserve is topped up at an miniscule rate by comparisson to the world market in oil. How that could possible impact the oil price is difficult to understand.

aSteve said...

Erm, from an American perspective, at the very least, I think that there is a lot of truth in "Greenspan did it". I think he was an imbecile over the TMT bubble of the late 90s, and about asset bubbles in general. I think that his decision to let the boom rip - then exploit the iniquitous advantage of controlling the world reserve currency to bale out the US economy was - well - deeply immoral... but Greenspan as much as admits that he was only ever interested in what was possible - not what is right. I consider him analogous to the engineer who designs the most effective nuclear weapons while blocking from his thoughts how and where they may be deployed - and the consequences.

When Greenspan was Chairman of the Fed I gave him benefit of the doubt because he was so respected. Only when I read "The age of turbulence" (his autobiography) did the extent of his stupidity and underhand partisan behaviour really crystallise. I _highly_ recommend reading this book... I think it the most interesting I've ever read... though I prefer you borrow the book rather than buy it, the man is a grade-A-arse... entirely undeserving of royalties in light of his admissions therein. The book is a must-read as it pretty much defines the whole of post-war world politics and economics. I don't trust Greenspan's ethics but understand now why he made the devastating mistakes he did... they arise because he was fixated on natural resources. I find his arguments about crude entirely convincing. I think he is genuinely disturbed about the direction events have taken in 2007/2008... and think he deserves nightmares about the extent to which he is culpable. What is amazing is that no-one challenged him for so many years.

Anonymous said...

Greenspan did it.

I just finished reading "Greenspan's Bubbles" and it's illuminating to compare what he said in the released FOMC minutes to what he said to Congress and the Banking Committee often just days later.

The guy is a fraud, an imbecile and a traitor. He really ought to be imprisoned for perjury if nothing else. It's clear from the comparison of FOMC minutes to Committee hearings that the guy deliberately lied under oath.

The fact he is now on a global speaking tour to revise history away from him taking the blame is scandalous. Even worse, there's the moral issue of the very financial institutions his Greenspan Put bailed out now paying him wads of cash as a dinner speaker. I think that's quite likely a breach of the Foreign Corrupt Practices Act.

And seeing as Greenspan usually had unanimous FOMC resolutions, that means Bernanke did it too.


aSteve said...

Bernanke is definitely relevant and interesting. I tried to research him by reading his thesis - which the media present as a strategy to have avoided the depression... but my interpretation was that it was very much more abstract than that. It gave me zero insight into Bernanke's scruples.

Your comments that Greenspans actions at least border on being corrupt coincide with my own impression of his lack of ethics. The distinction, from my perspective, is that "age of turbulence" was written by Greenspan himself - and yet he still looks bad... I'd always worry about a book like "Greenspan's Bubbles" - wondering if the commentary is partisan. If both agree...

Given Greenspan's stated belief in Bernanke (and their superficially similar backgrounds/personalities - decades apart) - maybe we should scrutinise Bernanke first as the more relevant public figure today?

Anonymous said...

I expect the oil market to collapse when the deep pockets that are sustaining it have decided that the US Presidential election is sufficiently decided. Just who is behind using the oil market to eliminate Republicans is obviously not clear, but Geo. Soros has been in the news lately as 'out of retirement'. Happenstance, probably.

Whoever it is will likely leave the market first, and short it. Once they fleece the greater fools, one might expect to hear who made a killing on the short call. Then you may find the dragon slayers.