Pricey Oil Forever? | Green Energy News

January 17, 2012 – Vol.16 No.44

PRICEY OIL FOREVER?
by Bruce Mulliken, Green Energy News

Right now in the US gasoline prices seem high, but tolerable. No one is screaming about pain at the pump. Consumers have adapted.

That could change in instant. If the price of oil were to skyrocket, prices of gasoline and other petroleum fuels would quickly follow suit.

For gasoline the economic laws of supply and demand are working. A slow economy and more fuel efficient cars and trucks are cutting into demand. On the supply side, refineries are at full tilt producing more fuel than the US market needs making refined oil products export items. Though oil is now trading higher than $110 a barrel, lowered demand and high supply of gasoline are keeping prices at the pump relatively stable only inching up slightly, not in great leaps.

The price of oil is determined on global markets. There, to some extent, the laws of supply and demand, are in force too. The more fuel growing nations consume, like China and India , the more pressure, the greater demand, there is on oil supplies. If oil demand rises faster than supply, even with new sources like Canada’s tar sands, then prices will go up. If oil producers want to, and have the ability to pump more from existing reserves, then prices will go down as supply on the market increases. (At one time it was believed that only Saudi Arabia had the ability to turn up the tap as it were. I don’t know if this is still true.)

Oil prices are also driven by emotion. If everything is right with the world, the world is at peace and the flow of oil secure, then oil traders relax and prices stabilize and perhaps fall. But events around the globe can raise emotions and along with it the fear of supply disruption. If Iraq moves close to civil war then expect prices to rise. If Iran makes a real attempt, other than sword rattling, to cut the flow of oil from the Persian Gulf, expect oil to rise. (With the firepower of the U.S. Navy in the region, Iran’s attempts to do this would be short-lived.) Even a civil war in Syria could effect the price of oil, though Syria is not considered significant oil exporter. (Just another trouble spot in the Middle East, traders would say. It could spread.) Another political hot spot to watch? Russia. Voters there weren’t happy about the results of the latest election that kept Vladimir Putin at the helm.

There are more factors that are controlling the price of oil. Fareed Zakaria focused on a rarely discussed component – national budgets in oil states – in a recent TV segment and blog posting:

“So a mix of war rhetoric and local troubles in key oil states are factors driving up the price of crude. And that translates to higher prices at the pump. Now that logic suggests that prices will fall when the news calms down.

“But perhaps not. Perhaps oil producers want these sky high prices. Usually the major oil producers understand that keeping prices too high in the short term means people start finding alternatives to oil. They start driving more efficiently; they start looking for alternate energies. But this time, oil states face crucial challenges. Look closer at the Arab Spring. The only oil rich country that has been forced into regime change is Libya. Why? The Gulf states lavish subsidies and salary increases on their citizens. They've upped spending to record levels to suppress any popular discontent.

“I saw some striking numbers this week: Look at the "break-even" costs for the world's top oil producers. That is the minimum price at which these countries need to sell oil so that they can balance their budgets.

“Russia now needs oil at $110 a barrel to manage its finances. For Iraq, the number is $100. Even Saudi Arabia now needs oil to trade around $80 a barrel just to balance its budgets. The numbers are also high for Algeria, Qatar, and Oman. Only a decade ago Saudi Arabia was able to balance its budget with oil prices averaging around $25 a barrel.

“So now it is in these countries' interest to keep oil prices high, which they do by curtailing supply in one way or the other. This is perhaps the most lasting impact of the year of global protest: High oil prices.

“So, the bottom line is an oil crash seems unlikely. Even though the engines of global growth are sputtering, be prepared for a period of expensive commutes. Maybe it's time to trade in your Escalade for a Prius.”

Zakaria hosts CNN’s Fareed Zakaria GPS, is editor-at-large and a columnist for TIME magazine, and a columnist for The Washington Post.

There's still more to the oil price story than economic laws, emotions and national budgets. There’s the relationship between politics, the oil markets and the true nature of the quantity and quality of known reserves, particularly in countries where oil is nationalized.

By far most of the world’s oil is pumped by nationalized oil companies: That is, companies owned by the state. While internally these companies may have a reasonably good idea of the amount produceable oil they have, it is up to their own discretion as to how much, if any, to report. Oil reporting is voluntary in other words. They can lie about it if they like. They can manipulate numbers if it suits a political purpose. Iran, for instance could be running out of oil and no one outside of oil and government officials would know.

But then what would happen if a major oil producing state suddenly said its taps were running dry? Chaos in the oil markets.

Then there’s the quality of oil in reserves. Not all oil is easily refined into transportation fuels, which are the largest market for oil. Some oil will never be refined into quality fuels. A nation may say it has a certain level of reserves, but not say what kind of oil is in the ground. A nation may have immense reserves of oil that will never find its way into the tanks of cars, trucks and airplanes. So called “proven reserves” rarely differentiate between types of oil still in the ground.

Unlike these nationalized companies, investor-owned companies have to be more open about their reserves to satisfy laws and insure stockholders of the value of their investments.

The world’s economies are relying far too heavily on something that is volatile in price with too many unknowns about its quality and quantity. Uncertainty is no way to run a world.

Links:

Zakaria: Why oil prices will stay high

http://globalpublicsquare.blogs.cnn.com/2012/01/15/zakaria-why-oil-prices-will-stay-high/?iref=allsearch