Sunday, June 22, 2008

Oil Summit

JEDDAH, Saudi Arabia — A one-day meeting here Sunday (6/22) of 35 nations (producing and consuming) and oil companies, including the CEOs of Exxon Mobil, Chevron, Shell, BP, ConocoPhillips, France's Total and Brazil's Petrobras will address the rising price of oil. Many doubt that much can be accomplished in one day.
Oil prices have doubled in the past year and tripled in the last five. Seven months ago Saudi Arabia's King Abdullah argued that $100 oil wasn't out of line with historic highs. Now oil is around $140 per barrel, and the king says that the price is too high, wants price stability and worries that high prices are destroying demand for their only natural resource which would leave no legacy for their children and grandchildren. Goldman Sachs predicts $150 oil this summer and warned that a spike to $200 is possible.

Saudi Arabia claims (rightfully so) that speculators and the weak U.S. dollar have played a major role in increasing prices. Traders (including Boone Pickens) are increasingly subscribing to peak oil theories that postulate production has reached its limit. U.S. Energy Secretary Samuel Bodman says that about 30 million barrels a day of oil is consumed in nations that subsidize oil.

1. The Chinese last week decided to curb subsidies allowing prices on gasoline to hover around $3 a gallon. 2. Saudi Arabia and other producing countries will need to convince the market that they have a fair amount of spare capacity to increase supply both near-term and long, and the kingdom is signing a refinery deal with Total to handle more of its least desirable oil; Saudi Arabia also has a $7 billion cooperative effort with Shell to build a similar refinery in Port Arthur.

3. Unlikely to be addressed at this meeting is the plummeting U.S. dollar. It's time for the American government to tackle this problem.

Numbers 1 and 2 cover supply, half of the economic equation in most commody prices. U.S. consumers are driving less and sales of gas guzzlers are falling. But Secretary Bodman made an interesting, quizzical and unelaborated statement: "For every 1 percent increase in demand, we would expect a 20 percent increase in price to balance the market." He may have the numbers to back up that statement. I would like an economist to explain it.
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Sen. John McCain earlier this year suggested that government drop its 18.4¢ per gallon federal tax this summer. Sen. McCain admits that economics is not his strong suit and at a time when gasoline could go up 18.4¢ per gallon in one week it was a dumb idea. Sen. Barack Obama simply stated that it was a dumb idea but offered no other solution.
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Today it is convenient and stylish to pay for gasoline at the pump. But it requires no signature. Visa, MasterCard and Discover Card guarantee that merchants will be paid $75 per transaction even if there is a payment problem. Need more than $75 in gasoline? Either pay inside with your signature or swipe your card twice.
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Recently a big rig driver complained about his gasoline expenses in hauling a truckload of drywall (Sheetrock is a brand name) from South Dakota to Houston. My first thought was, is South Dakota the closest source for drywall?
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A barrel of oil is usually considered to be 42 U.S. gallons.
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Simple answer to lowering the price: define a barrel of oil as 21 U.S. gallons and we're back to $70 oil.
I should be on the ballot in November!


Stymie Tapioca said...

So what was accomplished at this meeting? Not much, which met expectations. His Royal Highness Abdullah blaimed high prices on speculators, rising consumption in developing countries and high energy taxes in the West.
Saudi Arabia will pump an extra 200000 barrels a day beginning in July and vowed to raise production capacity from 11.2 million barrels a day to 12.5 million by the end of next year and as much as 15 million if necessary. But a growing number of traders believe the kingdom has reached the peak of its oil production capacity and are buying and selling contracts all the way to 2016.
The peak oil theory claims that world supply has hit its summit and the only way to get supply and demand to balance is by raising the price.

Stymie Tapioca said...

Mexico's Cantarell field in the Gulf of Mexico was once one of the most prolific but production started to fall two years ago. Alaska's Prudhow Bay field peaked years ago and the North Sea fields of Britian and Norway are down by 1.45 million barrels a day from 2003.