If one of the manifestations of global warming is that the price of oil continues to fall then perhaps it is not a bad thing! Only kidding of course. It is true that to a certain extent the warm weather in the Northeast is contributing to the decline of oil prices but only to a small degree. The primary reason that U.S.light sweet crude oil prices closed at $51.88 a barrel today is the reverse of the reason why it hit $78 a few months ago. Speculative money is running from oil as fast as it can.
Today's supply numbers have only exacerbated the problem for the speculators. Oil prices are in free fall and any body who has a good deal of exposure in futures contracts wants to dump them as fast as they can. The rise in supply figures are not as a result of a significant decline in consumption although that and other things such as ethanol have played a part. The real reason was the rush to production. When oil peaked at $78.40 in July and say you had a few wells what would you be doing? I bet you would be pumping day and night to get that oil to market as quickly as possible. Inevitably that would lead to a glut in the market place and that is what we are going to experience over the next year.
A trend like this is going to be very hard for OPEC to reverse. You will hear on Bloomberg and CNBC about the cartel meeting to discuss emergency production cuts but getting a consensus on that is going to be very difficult. The one thing OPEC members have in common beyond the fact that they are oil producers is that they also cheat on production quotas.
The cheating will be necessary from a number of strategic perspectives for the producers. Iran is busy meddling in world affairs while simultaneously trying to build a nuke program and placate the masses at home. Saudi Arabia will need additional moneys to invest in the defense of the Sunni minority in Iraq as American involvement slowly winds down over the next year or two.
President Bush may support a surge of troops in the near term but if sectarian violence continues between Shia and Sunni as surrogates for other regional powers how can that be bad for us if we make them fund the violence themselves?
The other members are in similar situations. Iraq needs to pump as much as possible for obvious reasons. Venezuela's Chavez has recently announced nationalization of big business in his country. Unless he attempts an out right theft of these assets he is going to need a big bundle of cash to pay off the owners. Nigeria needs any dime it can get from anywhere so it is inconceivable that they will cut production.
Russia is a huge player in this situation as well. They are going to continue production and exploration and they are going to exploit any existing and new markets that they can compete in.
Where will it all end? Well we might find an answer by looking back just a few years to price levels before all this non sense started. According to the BBC, oil was at $31 a barrel in 2003 and $41 in 2004. Those prices did not reflect any of the alternative fuels that have come to market since that time.
Barring any unforeseen disasters of a natural or unnatural sort we will be seeing a return to pre bubble prices over the next 12 months. On the way up there wasn't a damn thing we could do about it. Oil producers are going to find themselves in the same boat on the way down. What goes around comes around fellas!
