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Mike O
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Tyler D.
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JonWhy $120 oil is not good
Steve Hargreaves at CNN Money thinks that $120 oil is good because it will force us to start looking at alternative energy. If this were a normal market without government intervention, that would be the case. However, since governments have legalized cartels like OPEC, supply and demand does not work correctly in the oil market–government has screwed things up.
But to many, all the financial voodoo is merely a distraction. The fundamental reality of oil - and the thing that makes it so attractive to investors in the first place - is that we are using ever more and finding ever less. High prices are necessary if we are to reduce demand, find new oil, and develop alternative technologies.
I posted something the other day that directly relates to the subject of high oil prices. It was a quote from the Angry Economist, which I will repost here:
First is that there are sources of huge amounts of oil which are not profitable to extract when the Saudis are dumping oil. Second is that nobody is going to invest in these oil sources unless it looks like they can successfully sell their oil. So they’re not going to act simply because the price of oil is high. Everybody expects the Saudis to try to push the price of oil up to extract the maximum possible profit.
But if the Saudis are artificially restricting the supply of oil, they can artificially expand it as well. The people sitting on more expensive oil are going to wait to extract it until they’re sure that the Saudis can’t screw them by expanding production. (Emphasis mine)
Few people are going to begin to invest in alternative energy because the legalized cartel of OPEC (and other oil suppliers) allows for manipulation of the supply. Government intervention is messing up the way market forces should work to provide us with the most efficient use of energy. As long as the government stays involved, the higher oil prices can go with little threat from “alternative energy” solutions. The Saudis would simply have to increase production by a massive amount, drop oil down to $50 a barrel, and they retain their monopoly. It’s as easy as that. In a free market system, that would not work. The Saudis and other suppliers would be forced to keep their prices as low as possible to stay ahead in the market. Government intervention allows them to raise prices, then drop them if necessary to beat the possible competition.
Filed under: Asia, Economics, Geopolitics
The big thing to remember here, also, is that losing money for a year will not hurt OPEC, etc. in the long run. The saudis could just start dumping their oil at $50 like you said, and if they lost $10b they’d be unhappy but they would SURVIVE. Any ‘up and coming’ alternative energy companies would have no chance.
Ignore alternative energy, and just think about shale oil, etc. Same principle. There’s a stranglehold at present, and bringing in oil execs and getting mad at them is retarded - you can buy stock in oil companies. You can’t buy stock in the Saudi government. At the point in the distribution channel where you go outside the market (OPEC), you find the problem. This should not be news to people.
May I interject a couple of unhappy facts?
The Saudis have a bit of spare capacity, but not so much that they can switch it on and off at will to the extent that they will function as the “900 lb Gorilla”.
The Saudis do not “set” their price. It’s a commodity market. They offer what they have for sale, potential buyers bid for it. No individual “sets” the price.
If you want to understand why oil prices have skyrocketed, you have to understand why individual oil traders have made repeated decisions that a shipment of oil is worth a given price. They are looking at production and consumption figures every day with an eye what external factors may impact those commercial relationships:
1 - Let’s take Iraq’s production (about half of what it could have been in March 2003) and take that off the table for a year or two, then bring back about half of what it had been.
2 - Let’s keep poking Russia in the eye so they will retaliate with threats of supply interruption to Europe. Maybe Russia will “accidently” let a natural gas pipeline go down for a couple of days to press the point home.
3 - Let’s do some heavy-duty sabre-rattling with Iran to raise the spector of 25% of the world’s supply bottled up the Persian Gulf when the Straits of Hormuz are closed.
4 - Let’s de-regulate the crude oil trading business to make it easier for speculators to bring in unschooled hedge-fund money.
After we “accomplish” the above 4 items, where do you THINK prices are going? The surpise isn’t that were at a buck and quarter, the surprise is that we didn’t get here sooner.
Can someone explain to me how we blame the above on either the Saudis or Rex Tillerson?
Oh yeah, let’s keep pumping it into the SPR as fast as we can. Of course, tripping the high-level alarms on the tanks of the SPR is essential if you’ve already decided you’re going to attack Iran as soon as they take the bait, allowing their response to US provocation to be spun into a Gulf of Tonkin (non) Incident for the New Millenium.
Yeah, Lamont; try visiting Walter Reed hospital and tel the lucky ones only missing arms and legs from EFPs supplied by Iran that it’s a non-incident. Or one of the dozens of Qud officers that have been caught supplying training and arms (including EFPs) to Al Sadr’s thugs (and are working on doing the same for the remnants of AQI, just to keep the kettle boiling). No provocation at all.
Myself, I’m not too surprised at the rumors that some militant bases inside Iran might get targeted; nor would I be shocked if an EFP manufacturing facility in Iran had a nasty and noisy accident. There have already been various ‘explosive events’ that have gone on in Iran over the past year; the funniest of which was an early one in a remote area that the Iranians actually blamed on a UFO.
Can you send a link for that story, Mike?