Oil Gyrations

by Michael S. Rozeff
by Michael S. Rozeff

DIGG THIS

Should those who are concerned about high energy prices this winter (for fuel oil and natural gas) be locking in their supplies now at prices that are off the July peaks? The natural gas ETF that tracks natural gas prices (UNG) is now about $34, down from $64, and USO, which tracks oil, is down from about $120 to $89.

Prices are inexorably determined by supply and demand, and no one knows what the future supplies and demands will be.

Some of the influential factors can be discerned by examining a bit of history.

All oil prices come from here. They are the prices of Cushing, OK WTI Spot Price FOB (Dollars per Barrel).

1. January 16, 2008. Oil is $90.80. President Bush visits Saudi Arabia, completing an 8-day trip in which he meets with King Abdullah. Bush asks for higher production. Bloomberg reports that the U.S. will provide the Saudis with smart bomb technology. A Saudi official makes no commitment. Bush reminds the Saudis that if a high price brings on recession, that oil sales will drop. Saudi’s Oil Minister Naimi says that he is sympathetic to the concern over recession: "The concern for the U.S. economy is valid...we don’t want to see the U.S. economy go into recession in the future." Naimi leaves the door open to increasing production from Saudi’s unused capacity.

Note that King Fahd died in August, 2005. Dick Cheney, George Bush Sr., and Colin Powell then visited with the new King Abdullah. Earlier that year, in April, Crown Prince Abdullah visited Bush in Texas. Oil at that time was $54.33 and a plan for the Saudis to increase capacity and production by 2 million barrels a day by 2010 had been announced.

2. May 15, 2008. Oil is $124.25. Bush again has visited Saudi Arabia and asked for more production. Naimi announces an increase in production of 300,000 barrels a day.

3. May 17, 2008. Oil is $127.15. Bush acknowledges that the production increase is "something" but says it is "not enough."

4. June 10, 2008. Oil is $131.38, after hitting an interim high of $138.51on June 6. Price dropped when the Saudis proposed a meeting between major oil producing and consuming nations. Bush called the proposal "interesting." The Saudis continued to say that the price jump was not due to restricted supplies. Kuwait said the rise was not driven by "fundamentals."

5. June 18, 2008. Oil is $136.54. Bush sends Energy Secretary Bodman to Saudi Arabia for a one-day meeting of oil producers and consumers. The Saudis maintain they are pumping enough. Bodman calls for increased production.

6. July 1, 2008. Oil is $141.06. In an interview, King Abdullah repeats the Saudi position. He claims that Saudi Arabia produces to meet demand and has "nothing to do with the rising prices of oil in the world."

Note that Saudi Arabia cut production sharply by 1 million barrels a day in the last half of 2006 and into 2007. This was confirmed in February, 2007 by Naimi, who put production at 8.5 million barrels a day.

7. Oil talking-heads and experts disagree on how great the unused and available-for-production Saudi oil capacity is. Some put it at 2 million barrels a day. On July 21, 2008, expert Robert Mabro pooh-poohs the notion of peak oil and the hysteria about reserves. He implies that the Saudis can pump more from its well-behaved Ghawar field which is 110 miles long and 17 miles wide. He points out that we have lists of the fields that the Saudis have shut down that can be re-opened. He also suggests that the oil price rises are being driven by persons seeking investment returns, and that a bubble has formed that will burst. Oil is $131.43 when the interview appears, down from a double price peak. Oil hit $145.31 on July 3 and $145.16 on July 14.

8. July 17, 2008. Oil is $129.43. It has fallen from $145.16 on July 14.

9. August 11, 2008. China reports a 7 percent drop in oil imports.

10. August 12, 2008. Oil is $113.10.

11. August 13, 2008. The U.S. Department of Energy reports the sharpest drop in American demand for oil in 26 years, while non-U.S. demand rose and more than offset the U.S. decline.

12. August 18, 2008. Oil is $112.92. OPEC plans a cut in production, a news item speculates. In three days, oil rises to $121.23 before falling back to $116.31. The news item reports that Iran raised its production in July, and that OPEC’s total production increased in July.

13. September 2, 2008. Oil drops to the $110 area.

14. September 2, 2008. OPEC is scheduled to meet on September 9, 2008. Iran’s oil minister has called for production cuts and said that some OPEC members are producing above their assigned quotas.

September 4, 2008

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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