Is there such a thing and by whose measure? An unfair rather than fair price for oil is probably more identifiable. An unfair price is more likely when established by factors that are largely independent of considerations impacted by consumers and/or producers. Recent petroleum and refined product prices have been overwhelmingly driven by financial flows, and there has been very little connection to actual supplies, reserves or excess production capacity not to mention actual demand and use by consumers, industrial and retail.
Fair Markets v. Predatory Markets
The largely speculative factors that have dominated prices moving like a yoyo have had an undesirable effect on several levels. They make it difficult for production planning and development of alternative, including non-fossil, sources. They can and probably have contributed significantly more than acknowledged to the current economic recession. Recent spikes will probably also extend the recession. Of course, there is the undesirable impact of motives driven by exorbitant gains that unfairly tax populations for the benefit of a few. There is the real concern that manipulation may be the dominant driver. Regardless of whether there is actual manipulation, at least I am concerned that what I was educated at Columbia University Business Scholl to understand as “free markets” have in fact become “predatory markets” driven by considerations detached from the reality of supply and demand but subjected to the dominance of speculative flows seeking outsized gains at the expense of consumers and other fellow traders.
OPEC used to absorb the blame, in large part as much a stereotyped scapegoat as deserving of culpability. However, it has become clearer that much of the recent escalation as well as volatility has been at least in part spurred by speculation. After much delay and denial of the obvious evidence, the US Government and others are now starting to institute review and regulatory controls regarding the positions taken by financial rather than industry participants in the markets.
JP Morgan: “$60 per barrel” Economic Equilibrium & Other Considerations Contributing to Energy Prices
All of this is probably helpful in decreasing volatility. However, it still leaves the question of what is a more “fair:” a price that takes into consideration current economic conditions as well as consumption and production considerations? Here are several factors to consider:
$60.00 per barrel, JP Morgan has just recently evaluated as the price above which the current economic recovery will substantively suffer.
The price of opening new fields for production can vary significantly depending on numerous considerations, but is generally seen as from $25 to $70 per barrel.
There is around a 5 million per barrel a day excess production capacity within OPEC.
There are around 100 million barrels being held aboard tankers effectively converted into storage capacity. There is considerably more now held on land by national agencies as “strategic reserves.”
Refineries, particularly in US, are operating at multi decade lows in terms of capacity of utilization in order to sop up excess gasoline and distillate products and thus spur higher prices.
Natural gas prices are currently at multi-year lows in North America, probably more indicative of the global demand for energy particularly industrial utilization. (Because of greater costs and limitations associated with transport and storage of natural gas, it reflects more regional economic considerations.
Currency valuations are an important contributor to volatility of energy prices. As the economic crisis has stabilized the US Dollar has no longer been sought out as a safe haven currency and consequently has fallen, (with respect to other developed economy currencies), by an average of around 20%. The price of oil and gasoline though has almost doubled, exceeding by far the currency impact. We do not expect such a sustained fall in the US Dollar, and most expect it to trade within current levels.
Alternative sources and energy conservation will be having a long-term impact upon demand and thus prices regardless of the future course of the economic recession/recovery.
It is estimated that at least 3 to 5 years will pass before the demand for petroleum again reaches the levels preceding the current recession.
The rise of petroleum last summer to around $147 per barrel was predicated on the theory, speculation that while there where adequate supplies for the near term to meet demand, the ramping up of production could be tardy for the medium term, 3 to 5 years. The current economic situation, even with a rather more rapid recovery than anticipated, is not likely to cause a real shortfall with respect to medium term demand or probably longer.
A Prediction Based on JP Morgan’s Compelling Analysis
Making a prediction as to future prices or even components influencing such prices is a rather blurry and at best a momentary snapshot of a rapidly changing environment. Probably the most dominant factor that could force energy prices higher is inflation and an unexpected fall of the US Dollar. However, I do not anticipate this as decisive for the following reasons:
• While “reflation” is certainly a likely and necessary, perhaps even desirable outcome of the current “stimulus programs,” it is likely to affect all major currencies.
• The price of gold also has remained steady and thus does not seem to project a hyperinflation environment.
The $60 per barrel equilibrium defined by JP Morgan is in my opinion the key factor. While the actual number cannot be precisely predicted, at $50, $60 or $70, the analysis is compelling. In a period where the global economy is still recovering and vulnerable, it will be difficult for oil prices to be sustained at levels above the price that undermines such recovery and the overall demand for such petroleum products.
My best guess is a sustainable price of between $50 to $60 per barrel subject to any unanticipated and significant shortages due to conflict or weather.
Recent Comments