$250 oil forecast by Gazprom gains credibility
Now that Goldman Sachs once outlandish forecast of oil at $150 to $200 a barrel over the next 18 months is only $10 short of being fulfilled, commentators have been forced to look elsewhere for the lunatic fringe of forecasting. Step forward the Russian oil giant Gazprom with its raising of the bar to $250 a barrel.
Britain is calling for a summit of oil producing nations in Jeddah this Sunday to discuss the cause of higher oil prices, and perhaps the organizers should be sure to include Gazprom which clearly has ideas of its own. More conservative forecasters have, after all only been consistent in one thing and that is being wrong.
Oil futures in New York this week pressed the $140 a barrel mark for the first time in history. Yet there is considerable disagreement among experts about the cause of the oil price hike. It is not as though oil producer countries have been conducting an embargo like in 1973, and they can claim in some innocence to be keeping the market adequately supplied, or at least in so far as they are capable.
The oil producers lay the blame for higher oil prices firmly at the door of speculators. This column last week went a step further and named the loose monetary policy of the Federal Reserve as the real culprit for supplying speculators with cheap cash to speculate on oil prices. Hedge funds and investment banks have certainly speculated heavily in energy futures this year.
Whether it would have been better for the Fed to tighten monetary policy and throw the US economy into an even deeper and longer recession is another thing. That this action would have brought oil prices back down sharply is not open to question.
But I am cynical about the true motivation behind politicians calling for an oil summit to discuss what can only now be described as an energy crisis in the industrialized world. Is this not more a matter of governments trying to shift the blame for serious economic problems on to somebody else – actually anybody except them will do – rather than come up with a workable solution to this growing problem?
There are two sides to this debate. Those like US Treasury Secretary Hank Paulson who point to fundamental supply and demand issues in the oil market due to the expanding consumption by emerging markets. And those who blame the speculators, and may be like myself point to money supply inflation by the US Federal Reserve as a big factor.
The truth, as ever, is probably somewhere in between. Then it is a matter of saying that the base price should be say $50 and we have $50 of supply squeeze and $40 of speculation, or something similar. I doubt an oil summit to draft such a conclusion is really called for; the onus is for action, not attributing blame and deciding causal factors.
Oil is up seven-fold on its 2001 price, and is up 40 per cent this year, having recorded 28 all-time highs in 2008 so far. The BP Annual Statistical Review of World Energy came out last week and shows how the fundamental gap between supply and demand is growing.
Last year global oil demand stood at 85.2 million barrels per day, an increase on 84.2 million in 2006. At the same time global production dropped from 81.7 million to 81.5 million barrels per day. That is a recipe for higher prices in any supply and demand chart with falling production and rising demand.
A mounting economic downturn in the Western World will have an impact on oil demand, and also on the emerging economies such as China and India. All markets correct themselves and the oil market will be no different. Prices will rise until the point at which demand falls back to the level of supply.
The emerging markets are going to have to become more efficient in their use of energy, just as the industrialized countries did in the 1970s. As the BP Annual Statistical Review of World Energy states high oil prices in 2007 actually led to a one per cent fall in US and EU combined oil consumption of 35.6 million barrels per day, while the thirsty emerging markets demanded four per cent more oil and consumed 36.2 million barrels per day.
If the emerging markets became more thrifty energy consumers that would go along way to solving the demand side of the oil price equation. In fact, high oil prices will force emerging markets to become more efficient in energy use but this will take time; and in the meantime higher oil prices look inevitable, sustained by cheap money from the Federal Reserve.
On the supply side, the BP guide shows that production is falling and that proven reserves have also begun to fall for the first time. Indeed, Saudi Arabia’s crude output actually declined by 4.1 per cent last year, the biggest fall in total barrels from any oil producer, so much for raising production by 500,000 barrels per day this summer. It looks like too little, too late, and has done nothing to slow price rises.
Therefore, I have to conclude that blaming higher oil prices on speculators and the Fed’s lose money is a part of the explanation for higher oil prices, but perhaps not quite the whole story. The latest statistics from BP tell a story of supply and demand that no government can control, and leave Gazprom’s $250 per barrel forecast looking far more credible.
As oil prices climb higher, so does the value of my personal portfolio. Right now I’m praying for gas to break 200, once it does, I’ll sell off my positions and go short, making a killing on oil on its way up AND down. To all the people out there bitching about high gas prices, get over it. If you can’t afford gas, maybe you shouldn’t be driving a car. Oil’s price increases have made other commodities more expensive, and sure enough, I am profiting from higher food (wheat, corn, and rice) prices vs 5 years ago, and will continue to look for profitable investments. If you’re not smart enough to figure out how to profit from today’s markets, then I feel sorry for you (just like I felt sorry for the idiots who didn’t see Enron coming, I mean come on… that company had warning signs lit up in neon for at least 6 months before it all became public.)
hedge fund manager
July 2, 2008 at 7:03 pm
[...] $250 oil forecast by Gazprom gains credibilityThis column last week went a step further and named the loose monetary policy of the Federal Reserve as the real culprit for supplying speculators with cheap cash to speculate on oil prices. Hedge funds and investment banks have … Tags: Agricultural Prices, Bank Reserves, Brisk Walk, Central Banks, Dollar Policy, Exchange Operations, Fed Funds Rate, fed reserves, Federal Reserve System, Federal Reserves, Frequent Critic, Interest Rate Cuts, Money Creation, Moneylenders, Overnight Loans, Poor Economy, Reserve Currency, Senator Barry Goldwater, Strong Dollar, Train Ride, Treasury Operations [...]
fed reserves : federal reserve
June 26, 2008 at 4:27 pm
Seems to me that the upcoming G8 of Heads of State in Japan in July ‘08 MUST DEMAND a very tight GLOBAL OVERSIGHT of international banking activities
It is also obvious that absent the ability to screw the entire planet, the creatures of Jekyll Island who make up the Fed, their associated hedge funds levered at 30-1, and their political marionettes who pimp their propaganda to the public voters, would all be bankrupt.
I have looked closely at this situation and I state the only way forward is NOT TO GIVE MORE POWER TO THE CREATORS OF THIS GLOBAL CATASTROPHE – as seems to be happening IN MANY COUNTRIES, – BUT TO LEGISLATE THEM OUT OF EXISTENCE, AND DRAG THE INDIVIDUALS BEFORE THE COURTS. American hegemony is rightly hated throughout the globe, and history shows these corporate entities have no allegiance to any state, but their geographical position, and the complicit Washington administration, and politicians, brand the US with their theft and infamy.
Before any sensible global solution can be sought and implemented, these entities must be dissolved, as they will surely seek to corrupt for their own aggrandizement whatever arrangements, structures, laws, are enacted. And the global billionaires behind them, the old money, the families, must somehow be neutered before they wreak havoc in other areas.
The entire world needs to be made aware of these facts, and say, NEVER AGAIN, millions are starving to feed these filthy over-bloated criminals.
Their greed knows no bounds.
Washington, ie Bush will deny these charges at the upcoming G8, and refuse to halter Wall Street and the Fed.
This will sow the eventual seeds of a monstrous financial crash, as each nation pursues its own agenda in the face of Wall Street current profligacy and Fed currency debasement, and refuses to finance any more US bale-outs or bonds. The Fed is stridently pursuing more regulatory powers, and requires them “urgently”, – meaning before Bush takes the long walk. Obama may have different views, unknown as yet.
To a large degree, the Fed and Wall Street, and political whores are responsible for the current global catastrophe, they should be legislated down the exhaust pipe.
Promptly
I
June 19, 2008 at 10:37 pm
Olbermann nails it – awesome investigative reporting:
For those wondering if oil prices are manipulated, this is awesome theft by international criminals
Also worth reading WOW!
To judge the response of G8 Finance Ministers, see the links on the latest meeting, last weekend in Japan. Sheesh, and here was me thinking these guys had brains, – they don’t even share one!!!!!
I
June 19, 2008 at 9:55 pm
For what it is worth, I do think that we should also look at the oil supply reduction that has been done over the last several years and wonder whether some of this has truly been orchestrated at a higher level. For example, in 2006 Venezuela and OPEC decided to cut oil supply by 1-2 million BPD. Why? Because the price per barrel was going down. So, conspiracy theory aside, seeing as how OPEC nations are now considering increasing the volume….. doesn’t it serve their best interests to hold off as long as possible to make as much money as they can, but to eventually begin incremental BPD until prices come down to a level that doesn’t raise as much ire ?
Erik
June 19, 2008 at 8:10 pm
No I was not saying that Peak Oil is a crank view – the concept is an inevitable reality. I actaully believe we are currently right at the historical peak production of the hydrocardon era. I was just trying to differentiate Mr Simmons from the more extreme Peak Oilers – i.e. those that advocate immeadiately running to the hills and stocking up on food and arms while shouting the sky is falling…
Dubaidog
June 19, 2008 at 4:45 pm
No I think Peak Oil is a great example of a crank view that will be mainstream within a few years. You need to define it very carefully to avoid confusion. Oil is not running out but easy and cheap to access oil certainly is which amounts to the same thing. You could see a global depression with low oil prices. But I think that will be avoided and high prices will stay with us. It will take a decade to develop alternative sources and deploy efficient technologies in the emerging world – the more immediate impact will be on capital markets and living standards.
peterjcooper
June 19, 2008 at 3:28 pm
“Ideally it could act as a catalyst for governments to start taking the coming decline in world oil production seriously and investing in alternatives.”
I’m not holding my breath.
Governments, particularly western governments, have shown a distinctly ostrich-like response to what has been a well flagged problem. Even now the search is on for scapegoats and scoring political points, rather than facing the situation and seeking remedies/alternatives.
You think “Peak Oil” is a crank view, Dubaidog?
I
June 19, 2008 at 3:07 pm
A quick read of “Twilight in the Desert” by Matthew Simmons puts things clearly in perspective and should be mandatory reading for anyone with an interest in oil markets.
Mr Simmons is not a “Peak Oil” crank but a well respected Energy industry banker.
Hopefully the currect price crisis will subside somewhat over the next few months as some of the specualtive activity retreats.
Ideally it could act as a catalyst for governments to start taking the coming decline in world oil production seriously and investing in alternatives.
Dubaidog
June 19, 2008 at 9:33 am