Who is Making the Oil Fume ?

HP and Masadi,
Oil prices will continue to surge and many developing economies of the third world will collapse like a bubble.

Cheap Chinese stuff has soffocated small scale domestic production and un regulated markets. It has swept away the un noticed competetive parralel economies and made them consumers of cheap imports.

So when the bubble bursts, these countries will be on their knees. Thats when the IMF and WB of Bretton Woods will march in with their dictates of subsidies, market forces, revaluation of currencies and effect the coup de grace. Then uncle Sam will decide who to revive and who not to.

ijaz.gul@gmail.com
ijaz_gul@yahoo.com

Chinese can come in and increase their oil purchases from the same sources and drive the prices up. Energy consumption has one of the strongest coorelation to the industrial growth. When Chinese cut subsidy, last week, oil prices in the spot market dropped.

Anilji,

What exactly do you mean by China disturbing the economic order? What would that imply?

Regards

Majumdar:

That would certainly be an exercise. Wasn't 1 Euro was 92 cents in mid 90s? Also, this would only give relative impact, and not eliminate weakness in European economy.

To eliminate currency distortions in oil prices, Iran is trying to propose an "oil bank" with pledged oil reserves. This asset would be valued against a basket of currency to eliminate devaluation of oil assets.

I do not know the exact mechanism but this was the gist as I understood of Iranian proposal. I doubt it can be successful, as oil is an essential commodity and volatile with demand in the countries which would be in the basket.

Key is to watch Chinese moves, personally I do not think Chinese can go independent of the rest of the world. If they disturb the economic order, Zeemax had once eluded to it through induction of inflation, their production base as manufacturer for the world will be severely affected. I think America has two aces, Europe and China have one each. ME/Iran may want an ace, but their economies are incomplete due to limited local markets, and hence have limited ability to play.

Anilji,

Maybe you can chart how the oil prices have moved in Euro terms over the last 5 years or so. To remove the impact of dollar weakening.

Regards

Rise in oil prices and food products are linked more to the weakening dollar. Oil prices have gone up to prevent devaluation of oil as the asset. Whereas, farm and agri-business a large consumer of energy and petro chemicals is allowed to go up in price, the asset America owns.

Dollar, the preferred currency for both international trade, cross border capital flow (both debt and deposits), almost as if by policy, is allowed to float downwards to absorb almost three trillion dollar Iraq war bill. Three trillion dollars is the number per a Nobel Prize winning economist, instead of official Bush numbers. When dollar goes down, international trade and cross border capital flow are devalued. It indeed helps America, provided its economy can sustain the negative impact on economy. The U.S. has to remain the most competitive and most innovative economy in the world to maintain its dominance. This time it might be hard, as oil countries have alternate buyers in China and India.

Increase in oil and food prices are going to have two effects. The heavy energy consuming sector, except farming, will be severely affected; and faming and agri-business will see fresh injection of capital. Farming’s reliance on energy is being offset by increasing food prices.

In capital surplus market driven economies, such disruptions have healthy effects of pruning out old and inefficient.

HP Mian, please draw a time line, and you will find that oil started to come to the front and center after the great depression and around Second World War. Automobiles and jet engines, hence transport industry, were put together less than 100 years ago, America more than Europe became more oil dependent.

The change, now with many advances in place, can happen in shorter time. China, more than any other nation can seriously impair the transition because Chinese economy emulates the western consumer – producer model. Indian model is not as much energy consumer. Major question is who is going to pay for this change. Brazil and Russia – other of BRIC are either not as dependent or are self sufficient, why will they sock in, Oil producing countries are in no mood. It is going to be interesting how America navigates this time. In 70s, oil producing countries socked it, in 80s it was Japanese yen appreciation. One thing for sure is good, is that Bush is leaving.

Re: # 31

Delirium

Oil from shales is by way of extraction compared to the conventional drilling process. As a process it is far more difficult, costly and requires infrastructure that is beyond the scope of meeting normal demand. Drilling on the other hand is far more economical and practical thus the surge in historical production.

Subsidies are a sensitive issue but such is the situation that requires drastic and non-conventional actions. We really cannot make judgments regarding its impact since there are no parallels but given the state of global economy heading for a slowdown led by US probability of serious impact on demand is high. Problem is Inflation turning into hyper-inflation with slowing economies that of course is the ultimate worst case scenario.

You also talked of energy sector approaching the 25% weight in S&P 500, that too is debatable but given the current trends its quite possible. Personally, I would prefer to play the market as a contrarian, selling oil futures and buying the worst hit sectors (financials and consumer discretionary).

Finally, your comment regarding coal losing its importance is not 100% correct since it still occupies 50% and more of the global power generation needs. Point being, even though oil may become expensive and world starts to move towards alternative methods, oil will continue to be a important source of energy.

Re # 23

Thank you for your comments.

Since oil is essentially a utility (necessity) product, the removal of subsidies remain a sensitive decision. Considering the subsidies are removed, the decision would only be effective if we have the economically viable substitutes available that entice the consumer to switch. In case there are no other choices (of fuel and energy), we should only expect a marginal decrease in the demand of oil.

The world’s largest untapped oil reserves have reportedly been discovered in Northern Canada. (1.7 trillion barrels of oil approx.). Colorado, Utah and Wyoming are reportedly carrying approx. 1.5 trillion barrel of oil equivalent in the form of “shale� oil. According to another report published in NY Post
“The U.S. Minerals Management Service (a branch of the Interior Department) estimates 102 billion barrels of oil and 635 trillion cubic feet of gas beneath federal lands and coastal waters. By way of comparison, the reserves lying beneath the North Sea, a major source of oil for Europe, are believed to contain a total of 18 billion barrels of oil. “

While the direct and indirect (environmental) costs for extraction of oil from such sources are high, with technological improvements and now when the oil sails at its all time high, recovery of oil from certain such sources may become viable.

masadi, g'night already..man...can't you see you are counting sheep..and wolves and shit now. pagal insaan!!

The author writes "25 oil company CEO’s and 7 global energy organizations assemble at Red sea city of Jeddah today in a bid to explore ways to cool things down.."

Like farmers inviting wolves to a conference on how to reduce the number of sheep being butchered every night by wild animals....

g'night

By the way in continuing this oil and "democracy" link, when democracy or a democratic leadership comes in to use a country's oil resources for the development of that country instead of giving them to the "bretton woods" authors, like Mosaddeq did in Iran, those countries have always propped up dictators to loot those resources, so much for the Army apologist Leadenwinter's assertion for deception that democracy is what helps those neo-colonials loot the developing nation's wealth, similar is the case with the ME where they work with dictators and discourage any semblance of democracy to emerge....

HP writes "This consultant appears to be completely clueless. The oil demand is not going down in the next fifty years."

True, the consultant is clueless, Oil could lose its importance, how? when it is most profitable as a commodity with demand that has matured, as per design, growth in which is also managed and on the supply side, existing supplies that can be controlled through wars and potential supplies kept off through strategic reserves and undeveloped oil fields, and wholesale purchase of patents of alternatives to it by the major oil compaines who have major says in political directorates around the globe, not to mention the manipulation through hedge funds....and just because Al-Gore comes along and has a major impact on causing global food shortage and sky rocketing price people suddenly come to believe that oil will lose importance....

Mian, when countless diplomacy, wars and fates of entire nations have been managed to convert a commodity into one whose demand is inelastic and whose supply is managed by manipulation to result in tens of billions in profit (i.e. regardless of true demand and supply), you think it will be allowed to become unimportant and at this time after those barbarians have put in so much effort???

Army apologist Leadenwinter writes "Today the World still suffers from the Bretton Woods conspiracy and its bastard democracy: the willing surrender of your nation's resources and markets to your betters.

In today's World particularly when considering the more "ethnically challenged" nations there are literally hundreds of examples of the direct co-relation between democracy and national poverty Democracy is White imperialism and Iran now may be the last bastion of civilisation left in the world. "

The Bretton Woods agreement was for dictatorship and proxy control of the developing nations it had nothing to do with "democracy" other than its use as slogan. These new types of dicatorship supporters have read a book or two by the confused Left in the USA and based on those their new tactic is to push that confusion into a support for military dictatorship. Having not a clue about social structure that is non democratic and neo-colonial they rail against the failure of these countries whose democracy (and not dictatorship) is punished by the West, as if democracy is the failure that keeps them poor, not so. Having the deceptive morals of a snake and the minds of retards they try to make big claims like "correlations between poverty and democracy" not knowing what correlations are nor having a clue (like I proved when this fool wrote by the name of Mukhtar Ameer) of how to interpret data. With stop gap "democracy" within an establishment structure that is dictatorship to the core, which is then punished by the neo-colonial power by sanctions and withdrawl of aid and foreign investment (because the major looting and selling of the nation is done by the dictators that this fools supports), you expect such a correlation (even though it is not as he says without corresponding evidence).

If we can locate fools like this sellout and other supporters of the dicatators like the Q-wannabes, and get rid of them from this nation, democracy and the people will fluorish after an initial correction period and the Neo Colonials and their supports (like the snake Leadenwinter the hypocrite) will suffer.

“ Perhaps we are on the verge of a new era in which oil could lose its importance, exactly as coal did 100 years ago�

This consultant appears to be completely clueless. The oil demand is not going down in the next fifty years. The US is the largest consumer of abt 25% of the world production. Only 28% of the petroleum products used in automobiles in US the rest is in airline, construction, and other large defense producers. The US military is also a major consumer. The Biofuel and other shits are meant for automobiles and are not expected to make a big dent in the US demand for petroleum products. You simply can’t run industries, airlines, military, construction machinery etc on biofuel. By 2025 the US demand would go from 25% of the world production to about 28% so the US is not a problem. The problem is the emerging Chinese demand which is expected to hit anywhere from 18% to 25% by 2025. Indian demand would be about 4.5% by 2025 so India is not a major issue. There is not much change expected in the European demand also.

We have three major players US, China and Europe. The current production is almost on its peak and unless the prices go up, the exploration for new fields just will not happen. Two areas that will contribute significantly to the gas production Canada and Central Asia are held up now because of the cost issues.

Calgary in Canada is already an oil boom town and expected to grow even faster after the prices hit a certain threshold and stabilize at that price. However, the exploration and extraction will take time and expect prices to stay up forever.

The US and the Europeans are doing everything to control the current oil supplies. The US and UK were already together on this and France and Germany have joined the US. France suffered a major loss of contracts in Iraq and they would not let that happen again.

The higher prices are hurting consumers now but that is the only way to boost the oil production. Higher prices will force some countries like China or perhaps India too to start thinking about reducing their gas consumption. In India and China more than 50% of the Petroleum products are used for automobiles, they have to control that. Chinese have to be aggressive in developing some strategies to deal with the emerging problems.

However, if the prices are not high enough to meet the cost for exploration in new areas, the oil wars would breakout between China and the Western countries. The current high prices will hurt developing countries. Do The Western nations care for the developing countries? Nyah!

Ijaz, I have a great study recently done by the US oil companies about the future of oil. If you would like to look at it, I can email that to you. I am not sure I have your email address.

Mr. Bashir,

Nice article, where have I read this before?

You have made some very good arguments regarding demand but failed to highlight the real issue which is Peak of oil production, the main reason of price increases followed by subsidies in oil consuming countries such as China and India.

There is increased pressure on users of oil to remove subsidies which is expected to reduce demand but will also have the effect of higher prices particularly in emerging economies.

And where are the trillions of untouched oil reserves?