Cost of oil poses problems for the economy again
Shawkat Hammoudeh
Issue date: 7/3/09 Section: Ed-Op
Oil prices exceeded $147 a barrel on July 11, 2008. Before that, Goldman Sachs predicted that oil prices would reach $200 a barrel. But it did not. In fact, it dropped to close to $32 in mid January 2009 and some predicted that the price would go as low as $25 a barrel. But once again, it did not.
The world has forgotten Goldman Sachs' prediction and instead concentrated on the collapse. As a reminder of the underlying strength in oil markets, I posted on December 16, 2006 in the middle of the doom and gloom, an Op-Ed conjecturing an oil market resolution for 2009. I stated that I "believe oil price should be above $50 a barrel and should target $70 near the end of 2009." I added "The lowering risk and increasing risk appetite process should also be accompanied or preceded by improving stock market ….. The oil market should gallop behind the stock market. Thus, the stock market will be on the side of the oil market in 2009." On February 22, 2009, I posted another Op-Ed reminding those interested in the oil price that there are forces in the gasoline market working for the oil price to make a comeback.
While some once thought that the prediction of $70 oil was na've thinking, there are others now who think that the idea of an oil price reaching $200 a barrel in the foreseeable future is highly imaginative. Putting politics, economics and technology aside, let us first look at it from a philosophical point of view. The march of the oil prices to $147 a barrel - and most likely even more later - is part of the survival of the planet which has gone through forces of destruction such as wars, famines and epidemics but managed to survive The swine flu is part of those forces. The planet unleashes these evolutionary forces to ensure its survival. Based on this philosophical thinking, forcefully blocking out those forces will not be successful. This may be a reminder to President Obama who wants to discuss oil prices with the Saudis.
The collapse of the oil price may be considered a sudden block to those forces that were generated by man-made events such as the credit crisis, regardless of who is behind them. But the collapse has generated counter forces that again lead to higher oil prices to ensure the survival of the planet. One of these forces is the postponement and cancellation of oil investment projects. This can be considered destructive to current and future oil supply. According to International Energy Agency, $170 billion dollars worth of oil projects have been either postponed or cancelled. This amounts to a delay in additional future production capacity that is equivalent to 6.2 million barrels a day. The Organization of the Petroleum Exporting Countries itself reports delays of more than 35 of some 150 planned upstream projects, with some deferred until after 2013.
The world has forgotten Goldman Sachs' prediction and instead concentrated on the collapse. As a reminder of the underlying strength in oil markets, I posted on December 16, 2006 in the middle of the doom and gloom, an Op-Ed conjecturing an oil market resolution for 2009. I stated that I "believe oil price should be above $50 a barrel and should target $70 near the end of 2009." I added "The lowering risk and increasing risk appetite process should also be accompanied or preceded by improving stock market ….. The oil market should gallop behind the stock market. Thus, the stock market will be on the side of the oil market in 2009." On February 22, 2009, I posted another Op-Ed reminding those interested in the oil price that there are forces in the gasoline market working for the oil price to make a comeback.
While some once thought that the prediction of $70 oil was na've thinking, there are others now who think that the idea of an oil price reaching $200 a barrel in the foreseeable future is highly imaginative. Putting politics, economics and technology aside, let us first look at it from a philosophical point of view. The march of the oil prices to $147 a barrel - and most likely even more later - is part of the survival of the planet which has gone through forces of destruction such as wars, famines and epidemics but managed to survive The swine flu is part of those forces. The planet unleashes these evolutionary forces to ensure its survival. Based on this philosophical thinking, forcefully blocking out those forces will not be successful. This may be a reminder to President Obama who wants to discuss oil prices with the Saudis.
The collapse of the oil price may be considered a sudden block to those forces that were generated by man-made events such as the credit crisis, regardless of who is behind them. But the collapse has generated counter forces that again lead to higher oil prices to ensure the survival of the planet. One of these forces is the postponement and cancellation of oil investment projects. This can be considered destructive to current and future oil supply. According to International Energy Agency, $170 billion dollars worth of oil projects have been either postponed or cancelled. This amounts to a delay in additional future production capacity that is equivalent to 6.2 million barrels a day. The Organization of the Petroleum Exporting Countries itself reports delays of more than 35 of some 150 planned upstream projects, with some deferred until after 2013.
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