01 September 2009

Why Is Oil $70 a Barrel Rather than $50?

Oil stockpiles around the world are bursting at the seams, and energy demand is stalling with the choking economies. Oil production is already artificially cut back by the collapse of oil-producing infrastructure inside the inept national oil producers such as Venezuela, Iran, and Russia. OPEC has also cut way back on production in an attempt to bring prices back up to the $100 a barrel + range. Almost the only way to reduce production further, would be to start a middle-east war involving Iraq, Iran, Saudi Arabia, and the other gulf states.

So why is oil overpriced? You can trace the problem straight to Washington, DC, and the inflationary pursuit of the weak dollar.
A weaker dollar encourages producers to raise prices, or to consider pricing their output in a stronger, more stable currency. Meanwhile, non-US consumers experience stable or falling energy prices that encourage demand growth, which eventually leads to higher prices in all currencies. Either way, US consumers would see higher prices for petroleum products, though it's not clear how much further demand could fall in the near term, with US oil consumption already running 10% below 2007's, on a comparable year-to-date basis.

The dollar has already weakened by about 10% against the Euro and 5% vs. the Japanese Yen since March, as the resolution of the financial crisis and early signs of a global recovery have eased the fears that prompted a classic flight to dollar safety. This shift merely returns the exchange rate to roughly its level of pre-crisis 2008. Oil prices have risen by around 40% over the same interval, though how much of that is due to a weaker dollar is far from clear. However, from today's $70/bbl level, another 25% drop in the value of the dollar could return us to the threshold of $100 oil. _EnergyOutlook_via_NewEnergyandFuel
As the dollar plunges in value, world investors and large funds will chase value anywhere they can find it. As long as oil remains virtually irreplaceable in the economies of the world, oil will have value.

As Obama dollars keep dropping in value, Americans will find the cost of almost everything going up. Rising costs will outrace rising wages for everyone except government and quasi-government employees. The private sector will find itself choked, unemployment in the private sector will continue to lose millions more jobs, and mortgage foreclosures in both the residential and commercial markets will keep rising.

Peak oil? Yes, political peak oil. The only kind of peak oil you'll ever see. But worse than the high costs of energy will be all the economic blowback that comes with high costs, high unemployment, and continuing strain on the financial sector.

Meanwhile, that government and all its expenses just keep on growing. Who elected these clowns?

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2 Comments:

OpenID snakeoilbaron said...

I suppose that this at least means that the money Iran, Russia, Saudi Arabia and Venezuela are bringing in is worth less when they go to spend it on terror, regional wars and other mischief, right? Plus, they are getting this higher price on less products so nuts to them.

Tuesday, 01 September, 2009  
OpenID snakeoilbaron said...

I remember, back in the day, when inflation was being caused by labor shortages from an economy running hot. Now we have inflation and unemployment at the same time. What a wonderful age we live in. And all it took was to murder the economy and narrow the gap between the rich and the poor by making more people poor.

Tuesday, 01 September, 2009  

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