My prediction is that the price of Oil in 2009 will start to dramatically increase, and we will start to see this in the second half of this year. Let’s examine some of the market forces in play that substantiates my position.
The future price of oil is based on a number of the following factors:
1. Output - Oil production per day
2. Global Demand
3. Capital Investment
4. US Dollar
5. Global Stability
Let's examine each lever to see where the price of oil is heading, not in 4 to 8 weeks, but over the next 6 months. Let's start with Oil Production. Everyone knows that the OPEC Cartel is a managed monopoly and dictates global oil production. Currently OPEC has agreed to cut oil production output by approximately 4 Million barrels of oil per day, and will be meeting on March 15th to cut oil production further. OPEC has clearly stated that they will cut Oil production to help increase oil prices. From a supply side economics, this is the strongest lever; since potentially they could reduce oil production where demand is greater than supply, and the natural forces of the market would dramatically increase the price of oil, since oil is very "inelastic" (i.e. people require oil and will pay a premium since there are limited alternatives to oil)
We know that global demand for Oil has fallen over the last 6 months, as the global recession takes hold. Therefore, we have seen a little over 70% reduction in oil prices with less than approximately a 10% decline in global consumption! How do you the explain the 60% delta in pricing - some say it was the "speculation spread", however others believe that the global demand for oil increased significantly, especially with the huge economic growth in China & India and their corresponding apetite for more oil - alright let's say this is a toss-up and it's anyone's guess.
Investments for new oil drilling projects have come to a screeching halt, especially with the fall of oil prices. However, what happens when the $10 Trillion in Global stimulus funds (i.e. the US is not the only country spending money to stimulate their economy) works its way into the global economy and by 2nd half of this year we see the global economy picking up, as well as demand for oil? I can tell you that we will find ourselves in something referred to as a "short squeeze", and it will take time for investment to catch-up with demand and this should have an impetus in raising oil prices by the second half of this year.
Oil is priced around the world based on US dollar per barrel. What happens when the US dollar becomes devalued, since the US has a $10 Trillion dollar debt and is printing more money with no end in sight? Eventhough the US dollar has increased over other major currencies in the last 8 months, a lot of economists believe that the US dollar will start to devalue as our debt increases as a % of GDP, and major countries that currently hold US treasuries (i.e. our debt) begin to worry on the value of the US treasuries and begins to unload some of their positions. The result of the devaluation of the US dollar will have the inverse relationship by increasing the price of Oil, since Oil is priced in US dollars.
The wild card is always the current state of global tensions, stability, wars, and other global matters. Tensions with Russia with their neighbors, Iran Nuclear ambitions, War on Terror, Middle East Conflicts, or others that are looming could certainly trigger a disruption in the market and oil prices would certainly increase overnight.
When you sit back, and take a look at everything as a whole, the odds are stacked heavily in favor that oil prices will increase in 2009, and probably more so in the second half, as some of the items I described above start to make its way and create a perfect "pressure cooker", where the oil steam will have no where to go but up.
Do not buy into the fools "black gold" that prices of oil will stay low; there are a lot of powerful levers that are working against this theory. Take a look at the futures market for Oil, which is selling Oil futures at $60 dollars a barrel. Some companies are buying oil in the spot market for $40 dollars a barrel and then storing oil and paying $6 to $8 for storage costs, and intend to sell the Oil in the future for $60 dollars a barrel for a nice profit. Do they see something that we do not? They see the market dynamics at work, and their powerful models are seeing exactly what I have delineated above.
I do not have a crystal ball, and potentially there is a small chance that the price of oil will stay low throughout 2009, but I believe the odds of this happening is very low.
I hope this article is helpful at explaining how the market levers work when trying to predict where the price of oil is projected to go this year.......Anyone interested in a National Energy Policy that moves us away from being dependent on oil - not going to happen in the short-term?
I recently read an article in the New York Times around which adminstration - Republicans or Democrats - has had the most impact on the economy, and more specifically the S&P stock market index.
After reviewing the empirical data from 1929, if you had invested $10,000 under Republican Ppresidents, then your $10,000 would have grown to $11,733 (i.e. the number would have been $51,211 if you exclude the Great Depression under Herbert Hoover). However, if you had invested $10,000 under Democratic Presidents, then your returned would have ballooned to $300,671!
History has shown that a Democratic Adminstration has been good for the economy, and good for prosperity. Look at President Clinton, he was able to reduce the national debt, improve the economy, increase the average family income level, increase home ownership to the highest level, and had one of the highest returns in the S&P stock market under his Presidency. However, when the Bush adminstration came along, they immediately thrust the Amercian economy into significant peril not seen since the Great Depression. Furthermore, the Bush administration created the financial melt down, that many economists warned, since they did not provide any oversight and allowed Banks, Investment Bankers, and others to regulate themselves and over extend themselves with financial derivatives that created this financial meltdown.
Barack Obama, on the other side is seeking to stablize financial markets, and create prudent oversights so that we do not begin to leverage and gamble our future. The current situation is very ugly, and I believe that we are going to see some tougher times ahead of us over the next few years; but I feel more comfortable with Obama & Biden at the helm vs. McCain & Palin. We need a steady hand that is going to dig deep to find the root causes of this mess, and then think clearly on possible solutions.
Please click on the link below to read the New York Time Article:
http://www.nytimes.com/interactive/2008/10/14/opinion/20081014_OPCHART.html
Let's make history together, as we elect Barack Obama our next President of the United States.
I have heard some folks indicate that Barack Obama does not have Foreign Policy experience, yet these same folks are not critical of current leaders that have created walls with our allies, and refuse to have dialog with non-allies. Barack Obama's message is very clear, we need to create bridges to allies and non-allies, and we need to have positive and ongoing dialog as the engine of change. Current elitist attitudes on who we should sit-down to talk and who we should avoid is clearly not a Foreign Policy that can create positive change around the world. Our current Foreign Policy seems more like a Country Club, and if you are not invited in the circle of few then you can not play and do not have any voice in this world. Certainly, I can see why many countries are upset with the United States, since they also want to be heard and want to feel that they are respected - if not for their leaders, at least for their citizens that can apply pressure to their leaders to create positive change.
Barack Obama's vision for change in our Foreign Policy is dead-on, and we need to sit down and communicate, and then over-communicate with allies and non-allies as a process for positive change. This is a difficult and long process, however it is certainly better than our current Foreign Policy around creating walls and more friction.
