Monday, August 23, 2010

High Oil Prizes in Slow Economy, Sighn of the Times

Reading a recent article by Raymond Learsy on the Huffington Post about oil prizes being too high, one wonders, here to quote Learsy, "It makes no sense. Today's price of oil is $74 a barrel, having retreated these past days from over $80/bbl. This, a price more than 100 percent higher that the $33/bbl touched in February 2009. This, with land storage so filled to the brim that over 30 million barrels are kept in floating storage at sea. As one example, Kuwait's crude oil exports to Japan plunged by 47 percent to less than five million barrels a month. In spite of the summer driving season inventories of gasoline in the United States are rising. Supplies of oil at Cushing, Oklahoma, the delivery point for the New York Mercantile Exchange futures contract are less than 1 percent from their all time high reached in May of this year. Inventories in a 15 state region that includes Illinois rose to 97.7 million bbls/oil earlier this month, the highest ever since data was recorded, beginning in 1980 according to Energy Department Report. The price of crude taken together with the country's jobless rate of 9.6 percent makes no sense at all. Clearly the price of oil has lost all ballast to the dynamic of supply and demand."

Markets are always manipulated by speculators, that is the name of the game, there is nothing wrong in that per se, because speculators do make spectacular losses, if not, every speculator would be a billionaire,or at least a multi millionaire but that is not the case. Speculating has a higher risk than proper investing practices, but the higher risk enables higher profits.

However, even with the play of speculators in the markets, one needs to consider the Chinese and Indian factor, they are demanding a lot of oil for their economies that are growing relentlessly, a good thing. China has just taken over Japan as the number two economy, that in itself is not significant as western papers try to make it out, following correct economic policies, China has more people than Japan. Same as India, nothing for humanity to worry about, except for the few in the world who are scaremongers, the world is not afraid for there to be harmony. naturally oil prizes would be higher, without China and India growing so fast, no doubt oil prizes would be at maybe even $25 - 30 range. But we must remember demand for a commodity like oil is inelastic, prizes rise very fast relative to changes in demand.

The reason why 30 million barrels are kept floating at sea, and this figure will increase, is because the prize of oil would fall significantly, mind you Middle east countries made 10 year budgets on high oil prizes of around $120, then markets fell flat after Lehman brothers catastrophe, that is clear manipulation, but what can one do if somebody does not want to sell their oil, call them evil, let the oil float in the tankers, they will have to sell it one day, by then things might have changed significantly in the market. The longer things take to get to normal, the more will governments will have to move away from hydro carbons to nuclear, wind, water, and tidal power, who will be the big loser then.

manipulators of markets who themselves do not get out in time usually end up as big losers. Three new nuclear plants in the states or China would put paid to a lot of this nonsense.

Bhekuzulu Khumalo

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Bhekuzulu Khumalo

I write about knowledge economics, information, liberty, and freedom