The Troubled Outlook For Oil Markets
There was a nearly audible sigh of relief heard from the White House and motorists alike three weeks ago when oil prices, along with several other leading commodity prices, suddenly collapsed by almost 10 percent in one day. It appeared to signal the early end of a commodity bubble, and potentially reflected a new equilibrium for oil around $100 a barrel. While high, this level could be considered manageable given the exogenous factors, as economists call them, in play at the moment. Of the current $100 price of oil, as much as $15 can be attributed to weakness of the dollar, and another $10, according to a Goldman Sachs estimate, represents the political risk premium because of the ongoing instability in the Middle East. (Given the geopolitical ripples of our weak dollar, one might well regard Ben Bernanke as the de facto secretary of state and secretary of energy, as well as chairman of the Fed.)
But underneath the "all clear" signs from the oil futures market are new signs of worry and trouble ahead. Last week the International Energy Agency in Paris warned that the price of oil could strangle the global economic recovery, still in its fragile early phase, and went a step further in calling for oil producing nations (meaning the Middle East) to increase oil production to stave off renewed upward price pressure. Whether the leading OPEC nations will be more receptive to our pleas than usual may be doubted.
The Middle Eastern Intrigue Meter is turned all the way up to 11 at the moment. The next OPEC meeting, scheduled for June 8, will find Iran's whackadoodle President Ahmadinejad presiding. Ahmadinejad, along with his fellow whackadoodle counterpart in Latin American, Venezuela's Hugo Chavez, would like oil prices to be higher, not simply to spite the hated Yankee devil, but also because they are desperate for more oil revenues at home. The Saudis, meanwhile, just might go along with Iran. The Saudis are said to be furious at Obama for his lack of support for Egypt's Hosni Mubarak, and might well decide that it can repay Obama on the eve of his re-election campaign with $5 gallon gasoline. Thirty-one years ago taking 52 hostages sufficed to bring down an American president; imagine the effect taking every American motorist hostage would have on President Obama's re-election.
This is perhaps why Obama made the surprise announcement last week that he was ordering his recalcitrant bureaucrats to speed up issuing permits for more domestic oil exploration and production. This move seems disingenuous and cynical at the same time. Obama and other drilling critics are correct that even aggressive new domestic drilling won't bring down gasoline prices any time soon, and perhaps not ever, given the global dynamics driving oil prices today. The cynical aspect of the move reflects that fact that domestic drilling activity is up sharply: the Baker Hughes rig count shows that the number of oil drilling rigs recently passed up gas drilling rigs in the field for the first time in 16 years-a reflection of the low price of gas and the high price of oil. (Don't Look Now, But We're Drilling, Baby) Domestic oil production has started to increase already, reversing a steady 30-year declining trend. Obama's announcement will allow him to take credit as more production increases come on line, and neuter Republican demands for more drilling.
But most of the recent increase in drilling activity and production is taking place on private or state land beyond the chokehold of federal regulators and environmental lawsuits. North Dakota's oil boom-their output has tripled over the last two years (Brown Energy Brings Prosperity)-ends conspicuously at the Montana border, where federal jurisdiction takes over. The U.S. remains inhospitable to a serious expansion of domestic production. This didn't start with Obama and probably won't end with him with him either. Stephen Eule of the U.S. Chamber of Commerce's Institute for 21st Century Energy has looked at the history of global oil production over the last 40 years and discovered that there is a robust positive statistical correlation between rising oil demand and rising output from virtually all oil producing nations with one glaring exception-the United States. While China, Canada and Brazil's production increase positively correlated with global demand at a level of 0.9 or better, the statistical figure for the U.S. is -0.97, a nearly perfect negative correlation.
It is almost as if the United States deliberately wanted to be more dependent on foreign oil. Consider that while the World Economic Forum rates the U.S. 4th in its ranking of the world's most competitive economies, (Global Competitiveness), it would rank far down the list if the WEF were to look at the competitiveness of the oil and gas industry in isolation. A proprietary ranking of political and investment risk for oil and gas by IHS's Petroleum Economics and Policy Solutions unit places the U.S. 44th, below several African nations such as Angola, which is ranked 18th. (IHS PEPS) As an IHS analyst observes, in the U.S. "there is the constant threat of adverse contract or fiscal regime changes at both the state and federal levels of government. None of these threats or business risks is present in Angola."
Normally it is a political scandal for American policy to make it more attractive for a leading U.S. sector to invest overseas than here at home-remember John Kerry's attack on "Benedict Arnold CEOs" back in 2004, for example? The fact that there isn't more of an outcry about outsourcing our energy supply shows how far we've gone down the road of environmental correctness. If Obama is serious about wanting to increase domestic oil production, he'll move to open up new areas for exploration, and ask Congress to amend statutes that enable third party lawsuits to tie up drilling permits for years.
Note: While Iran still holds OPEC's 12-nation rotating presidency, and as such may preside over the June 8 meeting, Iran's President Mahmoud Ahmadinejad announced since this article's publication that he would not be attending.
