Opinion
- Editorial- Commentary
Mary King:
Energy price uncertainty
Oil prices rose to a staggering US$147 in July 2008 and with the economic recession fell to just above US$30. As the recession continues with bailout packages in many developed countries and the hope that India and China can maintain economic growth via supplying their internal markets, oil prices (not gas prices) are on an upward march, now over US$70.
The likes of the mathematicians-turned-financial experts who engineered the financial derivatives fiasco of Wall Street that shut down the global finance system are now telling us that the oil price figures that represent the "dynamics'' of the present oil market are sufficient to predict what will happen to the price of oil by, say, December 2009 or as far ahead as 2012.
The oil producers and the punters of the oil futures market who are hedging and attempting to make some money by betting on future prices, respectively, are also predicting and, some say, influencing the price of oil for future delivery.
The problem with this, besides the risk of feeding false optimism of global recovery to our leaders, is that energy prices, particularly oil, depend on the actions and reactions of people in general in these times of uncertainty, and how these impact on our economic, financial and other systems. Coupled with these is an attempt to impose traditional weak regulation and controls on the economic and financial systems by many governments.
But the general feeling among contemporary economists is that the global economy has moved away from being engaged with known risks of the known, to unknown risks of the unknown, and being uncertain and non-linear in its future behaviour.
My article, "The New Millennium", has already referred to the evolving complexity of our contemporary world that includes population growth, environmental damage, climate change, economic instability, with impending energy transition from fossil fuels resulting in increasing complexity and interconnectivity of our systems, shrouding the future including energy prices in uncertainty.
Some have accepted that the key to the future economic development is to create an experimentally organised economy that is robust enough to adapt to the uncertainty ahead. How then does the use of oil price moving averages, "contango'' and "backwardation'', help to predict the price of petroleum in these uncertain times?
In the past, economic development was closely tied to the availability of oil (and, increasingly, natural gas) and an oil industry that was subject to supply manipulation by the producers and a virtually inelastic and growing global demand.
This recession is not the usual business cycle created by the uncontrolled activities of our financial experts. It has to do more with the evolving complexity of the New Millennium. Such uncertainty is identified in the following summary of the Financial Post article, "Time for producers to hedge crude oil'', by Vincent Lauerman, that demonstrates the failure of traditional economic indicators to project oil prices:
The current rebound in oil prices, given the traditional supply/demand pricing model, should have been accompanied by significantly declining oil inventories in the world. Further, OPEC has kept its production ceilings unchanged. Despite these rising prices the US inventories in the main have increased by 15.1 million barrels in the week of May 28, to a new high of 1.8 billion barrels.
In March the OECD oil inventories rose by 15 million barrels to almost 2.8 billion. The estimate of oil being currently stored at sea is close to 100 million barrels at the end of April, compared to 50 million in January 2009 and none a year ago. With crude oil prices rising and the prices for prompt (spot) delivery lower than the futures prices (contango), normally, it is only a matter of time before the stored oil flows to the market and brings down the prices.
In this recession there is spare up- and down-stream capacity (OPEC with 6.3 mbd and Saudi Arabia is expected to increase its capacity be 1.2 mbd in June). Also, global demand is still trending downwards (the PM says otherwise) as the recession continues and even where there are signs of recovery these are weak. Some even doubt that a global economic pull-out will be large enough to push oil demand higher-the IMF is forecasting a 1.3 per cent decline in the global economy in 2009 (World Bank latest figure is three per cent! decline) and small positive growth in 2010.
Surely, oil prices are moving against what the economic fundamentals suggest. Is it that people are investing in stored oil (not easy to do that with gas) to combat the current economic and financial uncertainty? Locally there is high liquidity in the economy, i.e. high savings, high lending interest rates but no demand for credit, no investment and increasing unemployment with high inflation. Why?
Mary King is a columnist of the Trinidad Express (maryking@tstt.net.tt). Petroleumworld does not necessarily share these views.
This commentary was originally published by Trinidad Express, Monday, June 15th 2009 . Petroleumworld reprint this article in the interest of ou
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