Wednesday, August 27, 2008

Oil and Energy 2012

Our dear friends in OPEC have had the world and the US in particular in stranglehold since the 1970’s but they may have finally overplayed their hand. Actually, it isn’t just their greed that may bring them down but the greed of Wall Street Speculators who drove the price of a barrel of oil to an unprecedented $147 / barrel. The price of oil has fallen from that ridiculous high and in all likelihood will continue to fall and some forecasters are predicting $65 / barrel by 2010.

How is this possible? Several things seem to be driving the price of oil down and the slide seems to have begun on a rumor that the US Government was launching an investigation into oil speculation. Note that this was just a rumor but that was enough to drive the speculators into a selling frenzy which drove the price down. If the demand for oil worldwide was rising then the speculators would not have had such an impact when they sold, but the reality seems to be that the oil supply was meeting – if not exceeding – world demand. In effect the speculators were driving the price of oil up to artificial highs. This created a worldwide scare and reaction as the usual left wing politicians got on their demagogic bandwagon and began calling for punishing the Oil Companies for their obscene profits, when in actual fact the oil companies had lower profits than almost any other large company. But the critical point here is that the speculators created a scare and OPEC could not correct it because they were already producing more oil than the demand and that scare may have far reaching consequences.

Although the price of oil may fluctuate in the near term the long range trend will most likely be down as the dollar strengthens against the Euro and other world currencies. This fluctuation according to some analysts will center on the $100 / bbl mark but once that barrier is breached the slide will be steep and within six months the price of a barrel will be $65 or less. But all of this could be attributed to the usual swings in every commodities market, except this time it seems that maybe the realization that oil is a finite resource and an alternative must be found has gotten some traction with consumers. In fact it seems this scare may have actually shocked consumers to the point where they may actually take energy conservation seriously. Auto companies are sharply focused on hybrids and electric cars but more importantly consumers seem to have rediscovered public transportation and the logic in turning off lights when not needed. The day of the SUV seems to be ending as consumers are looking for ways to reduce the cost they pay for gasoline and as this trend grows it drives down demand which in turn drives down price, so the return of low priced (relatively) gasoline may be in the near future and certainly by 2012.

If this trend to develop alternative energy sources and reduce our alliance on oil and oil based products is sustained it will have far reaching consequences. Perhaps the greatest impact will be on the oil producing countries in the Middle East, especially Saudi Arabia, Kuwait, and the other Arab countries. These countries have failed to establish any sort of economic base other than oil and they have squandered the billions in revenue they have received on palaces and luxuries. The result is that if their oil revenues decline they really have no way of offsetting the decline. Worse they cannot rely on tourism due to their religious fanaticism and draconian laws. Furthermore they have become highly dependent on foreign workers and if these imported workers leave the over indulged citizens will be unable or unwilling to take up the slack.

Naturally the attitude among many as they see OPEC choking on an oil glut and declining revenues, will be that it is well deserved. Well deserved it may be but if this happens it could have far reaching consequences. Saudi Arabia and the oil producing Islamic countries are all highly unstable and any dramatic decline in revenues that impacts their social programs could trigger massive political change. Certainly the House of Saud could fall and would be replaced by an Islamic government similar to Iran’s, but other governments currently friendly to the west could also fall. This would create chaos in the oil markets but it would also provide massive amounts of cash to various terrorist organizations.

But not all oil producing countries are Islamic and countries like Canada, UK, Russia, etc, would not be greatly affected but some of the poorer countries like those in Africa might weather the storm politically but socially the impact could be devastating. These countries do not have the infrastructures or solid economic base that would allow them to compensate for reduced revenues. In these countries the impact could be reflected in even greater unemployment and reduce the standard of living from its already low level.

So while the price of oil and gas may decline as alternative fuel sources come on the market, the impact may not be all positive.

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