Oil prices aren’t high because of greedy oil companies or backstabbing middle eastern countries. Oil prices are high because of easy money. That is the message of David Uren in today’s Australian. I subscribe to his view but add in peak oil as yet another factor.
Uren says:
THE price of oil is unlikely to be reduced sustainably either by Saudi Arabia increasing its production or by mad Austrian schemes to tax speculators out of the oil market, both of which got an airing at the oil summit in Jeddah at the weekend.
As was the case in the 1970s, the oil price is rising in response to a falling greenback and rising inflation at the end of a long period of economic expansion.
Slower world growth, lower inflation and a firmer U.S. dollar would set the market back to rights. The question is whether that can be achieved gradually or will be forced through the shock of a global recession. Politicians would like a simpler solution.
The Saudis don’t have any more spare capacity anyway. If they had more, why haven’t they raised production already. Let’s get real here.
Oil is at over $130 a barrel. It was $12 a barrel just 10 years ago. Saudi Arabia has an exploding population and huge infrastructure needs to deal with. Don’t you think they would be pumping oil like mad if they had any? Come on. They’re tapped out. They can’t get additional production online, plain and simple. I recommend Matthew Simmons’ book “Twilight in the Desert” which covers the likelihood of a Saudi production peak in detail.
I would also suggest you read this article in full, because it highlights the fact that oil was poised for a breakout in the 1970’s not because of OPEC — they were opportunists, but because of an inflationary monetary policy by the Fed and the U.S. Government. Now we have a repeat of that same tragic episode. Throw in lots of commodities speculation and peak oil and you have the makings of some very high oil prices. But, as with all bubbles, this one will pop too.
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