ep, i have good news, stratfor stratfor.com is "puzzled", sealing the fate of financial metaphysics and economic voodoo, making almost certain that energy price will go higher, imo, much higher, until the back of the elephant is broken ...
Geopolitical Diary: Tuesday, Aug. 9, 2005
Oil prices hit $64 a barrel for NYMEX crude on Monday before settling to just under that price. Three explanations were given for the latest surge. The first was the security alert in Saudi Arabia against threatened al Qaeda attacks. The second was the decision by Iranians to proceed with work on its nuclear weapons process. The third was a refinery shutdown at a U.S. plant. According to the prevailing theory, the three factors together were enough to drive oil prices up by $1.63 a barrel, after having risen dramatically from a low of about $50 last spring.
This is not the highest oil has been historically. In fixed dollars, oil topped $90 a barrel in the early 1980s. That explains in part why the global economy has been taking these oil prices in stride, or -- if that is overstating it -- not having a breakdown as it did during the 1973 crisis, when prices quadrupled. What makes all this odd is that since 1999, when oil prices bottomed at about 15 fixed dollars a barrel, it has quadrupled again. The key variable seems to be time: In 1973, prices rose overnight; this time around, the increase took place over six years. While oil prices have risen steadily, they have done so over a period of years. So the process has taken longer and has not hit the historic peak. Prices would have to rise about $25 more now to challenge that peak.
We are certainly surprised by this rise, which is why we are not commodities traders. In a way, everything about it surprises us. It surprises us that the net result of increased energy costs has not driven the U.S. economy, which is heavily energy-dependent, into recession. It surprises us that oil-producing countries like Saudi Arabia or Venezuela have not -- as with the 1970s rounds -- emerged as major sources of petrodollars (now there is a retro phrase). It surprises us that global financial and stock markets have behaved as calmly as they have.
This seems to be telling us one of two things: Either the markets are saying that energy is no longer a singular vulnerability to the international economic and political systems and that soaring energy prices don't mean the same thing as they used to, or the markets are saying that these prices are not expected to hold. The consensus is that, given supply availability and growing demand, prices will continue to rise. Therefore, the consensus must also be saying that energy prices don't matter nearly as much as they once did. There is a case for this, but the combination of prices quadrupling steadily over six years with minimal effects on the global economy seems to us hard to swallow. Energy may be a smaller part of the economic mix, but this seems extreme.
The second explanation is that the markets -- as opposed to the pundits -- do not think that energy prices can hold at this level. We tend to believe this, but then we didn't think they would climb this high in the first place. Nevertheless, the linear assumptions behind growing energy consumption are built around assumptions about China and Europe that strike us as dubious. Even if supply is so constrained that no increase is possible there, the very rise in energy prices should start imposing limits on growth.
We are left with the assumption that energy prices either don't matter or won't last. Other explanations are that prices do matter, but not yet -- that they have to go higher, and stay there longer, before they will affect things. This is possible, but we wonder what that point of critical mass is. Alternatively, there is a war premium built into the price -- from Iran to Saudi Arabia to Venezuela, all unstable places. But what kind of war premium shows up in oil prices without an impact on stock prices?
Obviously, we are confused. What confuses us most is the lack of geopolitical consequence. The United States should be in crisis, and the Saudis and Venezuelans should be buying the world. Instead the Chinese are buying things, the United States is indifferent, and the oil producers are not behaving as if they are enjoying the windfall they have received. No one but the traders who went long are having parties, and no one but the traders who went short are getting drunk. Things are just not working the way they should. This can't be the resting place for oil prices. The system isn't responding the way it should for any scenario. |
