“High energy prices are part of the problem with the economy,” John Kilduff tells Bloomberg. He’s the vice president of risk management at MF Global Ltd. in New York, and he’s on to something. You can’t have high oil prices and high economic growth, at least not in a tandem for a long time. High oil prices, “are hurting consumers and may prove to be unsustainable.”
We asked our in-house trader and analyst Gabriel Andre what he thinks will move the oil price in 2008. Will it be investment demand? A geopolitical premium? Or simply the case where there is hardly any spare capacity and global supply remains maxed out just above 85 million barrels per day, while demand continues to grow? Hmmn.
For our part, we think there is at least $20 and possibly $30 of geopolitical and investment demand premium in the oil price. This is a cushion in the price above and beyond what the normal supply/demand dynamic would dictate. However, with supply so volatile in places like Iran, Venezuela, and Nigeria, you could make a good argument that the premium is going to be with us for awhile.
As if you needed further reminders, today’s Associated Press reports that, “Iranian boats harassed and provoked three American Navy ships in the strategic Strait of Hormuz, threatening to explode the vessels, U.S. officials said Monday.”
It’s an alarming story for many reasons, not least because nearly 16 million barrels of oil a day pass through the Straight. That’s two-fifths of all global sea-borne daily oil trade, according the Energy Information Administration. Japan gets 75% of its oil via this route. If you wanted to use oil as a weapon, this would be one place on which to apply pressure.
So what’s driving oil prices? Analyst Gabriel Andre reports,
“The rising price of oil creates several economic growth and financial problems in the short-term. The issue, with oil at 100 USD a barrel, is not so much whether this climb will continue, but mainly to know how the world will be able to cope with this “new deal”.
“It’s obvious that the world has no choice and has to cope with rare and expensive energy. World economic growth is already driven by the emerging countries, whose incomes come for a large part from the energy commodities. Thanks to the rising prices of those commodities, these counties can accelerate their development and then offer expanding new markets to the major industrial countries.
“The petrodollars accumulated feed the sovereign funds, the new big players in international finance, which then invest massively worldwide. Thus this redistribution partly fills the gap between the industrial and the emerging and developing countries. All because of oil.
“Medium-term, expensive oil leads to lower fuel consumption and also contributes to the renewable energies development. High prices reduce demand and spur the development of alternatives. The growing “Green business” (such as solar, wind, bio fuels etc…) has been promising to fill the energy gap for a long time.
“The high oil price will force several industrial sectors to review their process and productions. The automotive industry is of course concerned, but also the aeronautics and the construction areas which must innovate to increase energy efficiency and productivity. This innovation and the development of new activities will become the new drivers of the economy.”
“It’s going to be a long and hard road for people to adjust to a world of higher oil prices (in the long-term). It may require an economic growth model that’s more conservative with the planet’s energy resources and the ecological consequences of using hydrocarbons to industrialize 3.2 billion people. You may also see more struggles between sovereign Nations and corporations for the control of rare and expensive energy.
“The production countries will be tempted to use this tool to influence prices. It will create more instability, which could keep the price higher than slower economic growth might otherwise dictate.. In this scenario, the developing countries would be the main losers. It is difficult to clearly see yet who could be the winners.”
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