Friday, September 22, 2006

Oil pricing - absurd marxian analysis on the rise and fall of prices

Where is the media outrage over falling oil prices!

by StFerdIII

Where are the fulminations by the media on oil companies manipulating gas prices lower? Where are the tearful consumers crying with joy that they can now take their 3rd vacation this year due to the vagaries of the nasty oil cartel? Where is the puerile Marxist analysis by TV talk show hosts, about the wicked control of oil and retail gas markets by uncaring capitalists and their Jewish allies driving prices ever lower? Oil prices have just registered their largest drop in one year falling 20% in a few weeks yet nary a whimper is heard from the talking heads and media boffins on big oil’s ‘evil’ ways. As long as prices drop market mechanisms are fine. If they increase then conspiracies are trotted out to explain higher commodity futures. It is a fascinating display of ignorance.

But what of the good news from markets about oil? Even with the distorted influence of OPEC oil is a market commodity. Supply and demand determines the price of oil. The current drop in crude pricing reflects market sentiments. The market has grown increasingly less worried about the confrontation between the U.S. and Europe with Iran, over the latter's nuclear program. The Lebanese-Israeli border is relatively quiet. The Atlantic hurricane season has so far failed to disrupt the Gulf of Mexico. Healthy U.S. petroleum inventories exist and the US driving season is over. Worldwide a slowing global economic growth, the lessening of reserve buying by India and China and a conscious effort by China to limit its GDP growth all mean a slackening demand for black gold. As well new supply discoveries including the large deep-water oil discovery in the Gulf of Mexico by Chevron have aided crude's slide. In fact it is the biggest slide in recent memory with the front-month contract falling 21% since Aug. 7, when the futures settled at $76.98 a barrel, their second-highest close ever.

As well the Republicans will be putting pressure on the Saudis and others to ensure that supply outpaces demand. The GOP is in real danger of losing control of the House in November and lower oil prices are key to portray a healthy US economy as a positive aspect of Bush and GOP tenure. Americans at the height of the oil price spike were paying $70 million more a day collectively, than the year previously. As oil prices decline the $70 million per day extra cost will shrink perhaps helping with an increase in consumer spend or a relief of consumer debt. In any event don’t expect oil prices to rise too quickly if at all before mid November.

Does that mean the commodity and oil bull-run is over?

No. The oil and commodity run will start apace in 2007. The US economy is far stronger than the media portrays and irregardless of a housing slowdown the US economy will still grow by 3.5% in 2007. Global demand should pick up as well as Europe and Japan hold rates steady and stimulate their economies with looser monetary policy. China and India will continue to grow faster than their politicians would like consuming more commodities and stopping the slide in everything from gold, to copper, to oil. Some analysts including the IMF predict oil will be at $75 bbl in 2007 with others forecasting a range of $80-$100. Gold is forecasted to go above $700 US in the coming year. An increase in both gold and oil pricing will surely come to pass if there are geo-political problems; a confrontation with Iran; or a spike in Chinese consumption.

Oil is a market – albeit one distorted and mangled by OPEC, government intervention, eco-fascist regulations, supply drilling restrictions, and assorted regulatory costs and taxation. Even in such an impure market the commodity price of oil fluctuates to supply and demand conditions. A long term plan to flatten out the price of oil would be to build more refineries; roll back punitive regulatory costs on refinery building; allow supply to be drilled offshore in oil-shale fields; and curtail excessive and harmful eco-fascist regulations that prevents the above from occurring. The political will to do any of the above is lacking but they would do more to secure economic growth than all the billions of subsidies for various hare-brained schemes related to alternative energy sourcing which only lines the pockets of those smart enough to access government handouts. There is no market based alternative energy product that is cost-effective or usable.

One of the good reasons to support the Iraq war is that by occupying Iraq the West now has a bridgehead to break OPEC. Iraq was a member as are all of the Middle East producers. OPEC has now lost Iraq’s 3 million bbl per day output. Iran’s regime which is destined to fall one day will have a profound and splitting impact on OPEC. OPEC is a cartel that manages price supports never letting oil prices fall below certain levels. It has already stated that $60 bbl is the price floor in the current market. By controlling 40% of the world’s current supply of oil, OPEC has a fair degree of market power to coax prices up or down. Saudi Arabia is the famous ‘swing’ producer that the Republicans are probably leaning on right now to increase supply [they have an excess of 3 million per day they can pump on demand] to lower prices and save GOP seats in the November election. The Saudis erstwhile allies of US politicians might find themselves, once Iraq is stabilized, facing a regime change of their own. That will depend first on if or how the regime in Tehran is changed.

In any event markets do work. But don’t expect the media or the talking heads to discuss the fall in oil prices and why supply and demand forces and price points are necessary to stimulate purchase decisions and alternative fuel sourcing. The oil market is just another example of the common ignorance surrounding market forces and the allocation of resources.