2008 January 09 Wednesday
Hoarding Mindset To Keep Up Oil Prices In Recession?
Jim Kingsdale does not expect the coming recession to lower oil prices by much because oil producers will cut back production to maintain prices as part of their new hoarding mindset.
I would bet that if prices do fall sometime soon, maybe after the peak winter demand season, exporters will cut back fairly quickly to try to keep the price above $80 or so. Further, when prices eventually begin to rise again, perhaps in the Spring or Fall of 2008, exporters will then be slow to raise production, having just experienced lower prices. So I think a possible reduction in the oil price next year would be shallow and would likely be followed by a counter trend leg up that will probably bring the price well above $100.
My thesis is based in part on the hoarding mindset that now dominates the oil market and is hardly ever discussed. Exporters (read OPEC, particularly KSA, UAE, Kuwait, and Venezuela) are now addicted to high and rising oil prices. Their ever increasing cash flows from oil have led to their making huge future capital commitments; they are not willing to see falling oil prices endanger those commitments. They also know that due to tight global supplies relatively minor production cuts are sufficient to raise prices. Finally they now believe that oil in the out years will only get more expensive. Thus near term production cuts will also be rewarded because the oil not sold now can be sold later for more money. In summary, exporters today have their hands on a hair-trigger for raising the oil price and they will not hesitate to pull it if the price falls much below $85. I summarize this series of attitudes on the part of oil exporters as the “hoarding mindset.”
If oil producers respond in this way then the demand destruction in the United States will be greater. The recession won't take as much pressure off of inflation.
Continued high oil prices in a recession will speed the development of new energy technologies, both for increased efficiency and to produce energy from non-fossil fuels energy sources. Nuclear and wind power development should accelerate. Also, as the public comes to expect long term high energy prices they will make more lifestyle changes to lower their energy usage.
"Continued high oil prices in a recession will speed the development of new energy technologies, both for increased efficiency and to produce energy from non-fossil fuels energy sources. Nuclear and wind power development should accelerate. Also, as the public comes to expect long term high energy prices they will make more lifestyle changes to lower their energy usage."
In order for these "developments" to happen, government money is needed. But if the Republicans win the elections, they will use every dirty trick in the book to sabotage the alternative energy sources in favor of the oil industry. So pray that the Democrats will win the elections.
"In order for these "developments" to happen, government money is needed. But if the Republicans win the elections, they will use every dirty trick in the book to sabotage the alternative energy sources in favor of the oil industry. So pray that the Democrats will win the elections."
Bill Clinton was president for 8 years. Democrats have controlled Congress on numerous occassions as well. As far as I can tell, they haven't done too much for alternative energy either, like having a plan for building more nuclear power plants, geothermal, solar, wind, hydro, etc... Please let me know if I am wrong about this or if I have missed some program that Democrats have been trying to implement, but none of the Democratic candidates are talking about this from what I can see.
You are correct about Bill Clinton, but during the 1990s there was plenty of oil and the illusion that the glut of oil was going to persist forever prevented any new incentive to develop alternative energy. Politicians do not have much foresight. But despite this, now that we are in a desperate situation, Bush ironically allocated a ridiculously small amount of money only for hydrogen, and hydrogen is too unrealistic in comparison to pure electric cars that rely on batteries, so the oil industry stays dominant for at least another 50 years.
So having another bunch of short-sighted politicans in power (who could happen to be Democrats) is going to help us how? As I said I, don't see any Democrats interested in alternative energy. In fact, many seem to be against it. Please see Senator Kennedy's concerns about windmills blocking his precious view in Cape Cod.
TR said: "..they haven't done too much for alternative energy either, like having a plan for building more nuclear power plants, geothermal, solar, wind, hydro, etc"
Its important to distinguish between energy sources for mobile power generation (eg combustibles for vehicle engines) and energy sources for fixed generation (electricity power plants). Given the state of current and medium-long term technology, they are not substitutable. Or to say it another way, a geothermal fixed power plant doesn't really constitute 'alternative energy' for powering a mobile power plant, so you could build a million fixed power plants and you'd still need to import exactly the same amount of oil as an energy source for vehicles.
You are right. Clinton and Saint Albert were thorough disappointments on energy policy when they were in the White House. They didn't propose much funding for photovoltaics or batteries.
The Republican Party isn't controlled by the oil companies. The rest of American industry has a say about Republican policies and they do not want expensive oil and they want cheaper alternatives.
The point that is lost is that the oil price (like that of every other commodity in a free-market), is simply driven by the laws of supply and demand.
Who knows what the future will bring?
Perhaps Saudi Arabia with a big and growing population will seek more cash by pumping out more oil, thus undercutting others and increasing supply.
The temptation to do this is always there, and the 'rational' price will assert itself.
To a rationalist, potential profits at some indefinite future date - combined with the vagaries of what commodity priceswill be at that point, are not the main concern, but extracting the maximum possible amount of liquid cash from your asset in the here and now is the primary concern.
the maximum revenue is, of course, determined by the maxima of the classical economic price vs. demand curve - any other level of production is economically harmful to the producer.
The point is that ready, liquid cash can be instantly converted into a higher yielding asset in a growth industry (ie telecommunications)that yields not only an income but an ever appreciating asset.This is now being done through the medium of 'sovereign wealth funds' which historically have proved outstandling succesful, and will ensue guranteed living standards for future generations.
Oil sitting in the ground is as useless as gold sitting in a bank vault ie it does nothing, ad you might as well not have it, as I believe an AEsop fable tells us.
A Sovereign Wealth Fund is not always going to make wise investment decisions. Some of them invest in US Treasury Bonds. If the US dollar declines or inflation takes off they don't do well. Some Middle Easterners invested in Citibank and other US financial institutions and along came the mortgage crisis and the freezing up of the CDO market. Their decisions didn't look so wise. They can't be guaranteed to earn high returns if they pump the oil and invest the proceeds. They know that.
A big oil exporting nation that restrained its production 10-15 years ago was making a wise investment decision. The stuff sitting in the ground has gone up in value by a full order of magnitude since 1998. Oil might now double or triple in price. Well, why pump now when you can pump 5 years from now for a much higher price?
Publically traded oil companies have a bigger incentive to produce now to get higher quarterly profits now. National oil companies have more incentives to stretch out their production over more years. The pattern with the national oil companies has been to produce more slowly. The Saudis have usually produced below their production capacity for decades.
Oil sitting in the ground is wealth that to all intents and purposes does not exist.It would be a better benefit to future generations to realise it as an asset now and let the earnings 'sweated' off it pay now for the vital investment and infrastructure projects that will give future generations 25 years from hence a good standard of living when they need it.
Furthermore, a good model for the sovereign wealth funds are the Harvard and Yale university endowments - the fruit of wise investment decisions made in the past that now total in the tens of billions (at least).
The secret is to appoint a good fund manager and to make good investments.I believe that the vital capital that McDonald's (hamburgers) needed when ray Kroc started off its great expansion was supplied by the Yale fund - probably one of the wisest business decisions ever taken in history.
Infrastructure in Saudi Arabia and other Middle Eastern countries is not well maintained. What would be routine maintenance in a Western country does not get done there according to accounts I read. Things fail quicker there.
Yale and Harvard have exceptionally high rates of return and exceptionally competent money managers. Most big pension funds and mutual funds do not beat the indexes on their actively managed money. These Sovereign Wealth Funds could choose to invest in index funds though.
Bill Clinton was president for 8 years. Democrats have controlled Congress on numerous occassions as well.
The first time this appeared on the radar and Congress tried to do something about it, the public voted Ronald Reagan into the White House; Reagan promptly dismantled most of the efforts. And have we already forgotten 1994, when the Democratic congress had just started to move on energy issues when the public voted for the "Contract with America" instead, and killed the initiatives again? We got welfare reform out of it, but I think we fixed a small one and left the big one to fester.