Ready for $262/barrel oil?

yahoo ^ | 1-27-06

[LouAvul]

DAVOS, Switzerland (FORTUNE) - Be afraid. Be very afraid.

That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.

The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England -- and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says.

"U.S. power and influence has declined precipitously because of Iraq and the war on terror and that creates an incentive for anyone who wants to make trouble to go ahead and make it." As an example, Soros pointed to the regime in Iran, which is heading towards a confrontation with the West over its nuclear power program and doesn't show any signs of compromising. "Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided," he says.

Another emboldened troublemaker is Russian president Vladimir Putin, Soros said, citing Putin's recent decision to briefly shut the supply of natural gas to Ukraine. The only bit of optimism Soros could offer was that the next 12 months would be most dangerous in terms of any price shocks, because beginning in 2007 he predicts new oil supplies will come online.

[SauronOfMordor]

What goes unmentioned is the role that free trade has had in getting the US dependent upon the free flow of Mideast oil, even if we ourselves get most of our imports elsewhere. Knowing that OPEC can drop the price once there is a glut to wipe out synthetic oil keeps the industry from developing. Free trade and energy independence are mutually incompatible.

What's needed is a tariff on imported oil, to permanently change the economics in favor of domestic production

[Sunnyflorida]

"1) You conceptualize petroleum supply/demand interactions as though they were instantaneous - in fact many of these adjustments could take years to decades, and we could (probably, will) undergo enormous disruptions in the interim."

Supply/demand interactions are lightening fast. It is called price volatility. The place were this thread started. You make my two major points. It is not the supply or demand that drives prices. It is the future demand and supply. Oil markets despite the government created friction are amazingly efficient. I'm not saying we could increase domestic production overnight, but the threat of the increase DEFINITELY bounces the market. NO DOUBT ABOUT IT. If the politicians (mostly democrats) backed off the US DoE could manipulate these prices way down. Were you watching the intra-day oil prices during Katrina, it was amazing. News moves prices. In fact track the raise in actual usage to prices. Proof. There is no simple linear math that works.

"2) You are thinking of "marginal" supply in the context of events like Katerina - which which was a disruption of *domestic* refining capacity - when in fact the concept of marginal supply in general is is conditioned on *international* conditions."

Well there was some crude production/delivery disruptions also, not just domestic refining. In any case consumer reaction was stark.
Moreover. If you read the complaints people have of the classical economists (Sowell has a great very short but very dense book on the topic) the major objection is that the theories are hard to test. Katrina was a lab experiment. It is not legal proof but scientific proof that consumption is effected by very small demand changes (heck people loaded up at ridiculous prices before the friggen storm) and look what happened around the talk of releasing a drop or two from the Strategic reserves. This proves the curve is extremely non-linear. Your statement " the concept of marginal supply in general is is conditioned on *international* conditions." is not true. The concept of margin is true for all conditions by microeconomic definition. The margin may be near linear but usually not. But thanks this is going to send me off my couch and into the library to pull out a formula or two.


"3) You are thinking about this in the context of a world in which the US drives demand and the the oil producers must recycle profits in dollars, while increasingly we are in a world where suppliers have other markets and strong long term incentives to diversify aways from dollar dependencies."

Not really. As long as Oil is quoted in dollars we have a bit of additional leverage (Greenspan RIP). The big question is will oil producers denominate in Euros. What happens when these otherwise useless economies try to dump Euros on the market. I need to think about that. My innitial reaction is a devaluation of the Euro and probably why it has not occurred. But thanks again. I need to think about that - purely theoretically, of course.

Meanwhile my point is I think we are a bit more agitated than we need to be. We need to allow domestic production at a marginally higher level to wrest some control and stabilize prices (albeit it higher). Higher prices will allow political cover to create a more efficient energy market. As long as people like BOR get no traction (what a dope - on this topic). Stable higher prices is the only thing that well get all these alternative "technologies" going. As a consumer you can easily defend yourself from higher prices with a very simple hedge. And if you really want to have some fun you can make a bit of money at it. I do.

[Sunnyflorida]

tariff = tax.

Our price goes up but everybody else in the world gets it cheaper. Plus domestic prices go up also, just so the government gets more money? Explain why that is a good thing?

Please.

[Sunnyflorida]

Check out post 341!!

Is this what is know of as a troll?

[M. Dodge Thomas]

You are talking about microeconomic theory; I’m taking about economic reality.

If the price of oil was to suddenly double again, and stay there for several years (for example, a major production disruption in Saudi Arabia) the markets, left to themselves, would continue to operate, and likely behave pretty much as theory dictates.

The airlines (for example) however, will not – every US carrier will be bankrupt. (Actually, I suppose that some sort of bail-out would keep them operating, at taxpayer expense).

Similarly, demand will indeed adjust – for example as substantial numbers of Americans discover that it no longer makes economic sense to go to work if you are driving a Chevy Suburban 50 miles each way to a $12 / hour job - working five hours to earn the post-tax income to pay for the gas to get you there is a bit discouraging.

So IMO while in the abstract your observations are correct, in the real world the practical domestic and geopolitical realities of a substantial world production shortfall would likely render market mechanisms quickly moot, and likely for a good long while.

[WOSG]

"Absolutely - and our opportunity to switch to nuclear has been squandered by the leftist kooks in this country for fear of "the China Syndrome""

... While nuclear seemed stopped in its tracks in the 1980s and 1990s, I think times have changed.

Even some environmentalists have warmed to nuclear power, as possibly the only practical alternative to greenhouse-gas spewing coal power plants.

The nonsense fears you mention are growing less credible each year. 1979 was the worst accident in US nuclear power's history, and not a single person was killed or injured by nuclear radiation. Since then there has been a record of almost 30 years of safe operation at over 100 US nuclear plants. Given the recent deaths of coal miners, and given the global warming and acid rain issues, nobody can claim that nuclear is more dangerous or poses a greater environmental hazard than coal.

Nuclear power is the safest, most environmentally friendly form of electrical power that could serve America economically. It is a renewable source of energy, and unlike other renwables (solar, wind) that are not economically competitive, nuclear power can compete with any other form of electrical generation on price.

[R W Reactionairy]

"and that was the biggest find since the North Sea 30 plus years ago."

Oops. In fairness, I forgot to mention Canterell [spelling] in Mexico ... a super giant that IIRC was found in roughly the same general time frame as the North Sea. Still, the point remains -- if we only bag an "elephant" or two every thirty years, [during an era that saw higher prices; 3D seismic and other exploratory technologies; and a boat load of exploration in hostile environments] then politely stated: the IEA projections are highly suspect.

[fallujah-nuker]

Check out post 341!! (by SauronOfMordor) Is this what is know of as a troll?

If you checked the join date for "SauronOfMordor" you will see he joined up in November of 1998. I highly doubt that someone would join Free Republic with the expectation of being a troll seven years later. A troll is given away by joining Free Republic and immediately posting threads. They will often have inflammatory titles but claim that they read this somewhere and are trying to refute it.

They normally do not respond to anyone else who posts on the thread, and are zotted in short order. If you see lightning bolts, cats and kittens, often with Viking helmets, it is a troll who got zotted. Often times the word "Zot" will be added to the title by the moderators.

If you take issue with the text of his post I would suggest debating his position rather than inferring that he is a troll. I agree with his point, only natural since post# 341 was a reply to me.

In peacetime prior to 9-11 the US spent sixty billion dollars per year to ensure the free flow of oil from the Mideast, one dollar in five spent for defense went for that. This amounts to a subsidy of oil from the Mideast, even though we ourselves get most of our imports from elsewhere. Shutting off the Persian Gulf would cause oil that flows to the US to be bid up so we have no choice.

It ends up that in peacetime we subsidized oil imports by $15 per bbl, a tariff would collect the cost of this subsidy from the point were the cost is incurred. When you subsidize the production of illegitimate babies through the welfare state you end up with a bunch of illegitimate babies. Subsidize oil imports and we end up dependent on imported oil.

On September 11th, contrary to popular belief, we were not struck by terror, we were struck by radical Islam. Terror is a favored weapon of the Islamofascist, another favored weapon is the oil weapon. I can well recall the embargo of 1973 during the Yom Kippur War, people were only allowed to buy a few gallons of gasoline at a time and there were long lines at the station. My father had a sales job at the time and he had to have gasoline to put food on the table. I had a paper route at the time and every morning I would see my mother in a line two blocks long to get the few gallons of gasoline that my dad needed each day.

Perhaps I am injecting emotion here but I loath those filthy SOB's for that alone. I saw firsthand the effect of reliance upon barbarians for our energy. The enemy has shown the will to wage economic war against us, we have not shown the same national will. In WW2 we waged total war against the Axis and the results showed, by December 7th of 1945 our enemies had been utterly crushed, the wind sown four years previously having been repaid with an awesome whirlwind.

By way of contrast on the 11th of September of 2005 the Islamofascists were enjoying an economic boom through oil prices. And industry that their inferior culture was utterly incapable of creating, like the Moon god they worship they only shine due to reflected light, from the Western civilization they so despise but without whom they cannot enjoy the lifestyle to which they've grown accustomed.

In WW2 the home front made a great contribution to winning the war, today the homefront is AWOL, not willing to share the sacrifice with the troops on the front lines. I will quote the tagline of another FReeper, "Fight like WW2, finish like WW2, fight like Nam, finish like Nam."

[RightWhale]

Is this what is know of as a troll?

No, actually very mainstream in American history.

[RightWhale]

a quick shot to $3.25 this summer

If there is anything to believe about the oil industry it is that those in positions of business management, such as the Board of Directors, look way beyond momentary price spikes. Indeed, you may find that Big Oil is already the major player in solar cells as well as oil shale and tar sands.

[JeffersonRepublic.com]

"...our opportunity to switch to nuclear has been squandered by the leftist kooks...Curiously, the French have done quite well , with 70% nuclear power they will survive"

It's sad that the European are in better shape to handle a global energy crisis then the US. I wouldn't blame the "leftist kooks". You should never follow lunatics or let them run the country.

Is it true that the French dump their nuclear waste in the ocean?

[Thunder90]

Remember that Soros is secretly in the pocket of Russia and China.

[Thunder90]

Soros was alleged to be an agent of the KGB, and now would be SVR.

[Thunder90]

The Chinese and Russians want to send a combined force in to take the oil, should we take Iran.

[Thunder90]

Russia would not be too happy either about this. They want to keep prices high (At least to offer China dirt-cheap prices for oil and make a good profit from it)

[Thunder90]

Ahhem... A really pissed off new Soviet Union, China and India would come after us if we did that.

[Thunder90]

The thing is that besides the China thing, Russia and the states allied to it are actually hoarding oil right now. The Chinese are doing the same thing as well.

[fifthestate]

Do you think the Chinese are going to sit on their hands during that?

I say we gladly offer half to the Chinese. If they're smart, they'll take it and smile.

[F16Fighter]

"shutdown. all cost of goods skyrockets as a part of transportation costs, including food, energy. some people finding it cheaper not to work than drive 20 miles to work, if they cannot carpool. major political upheaval, unemployement, and if it last for any amount of time, the first depression since the 30's. Major public companies with heavy debt (airlines are just one) declare bankruptcy as they cannot meet covenants. That is just here."

Yep, utter chaos...Reason enough to "remedy" the situation any way we need to.

[F16Fighter]

"actually since food and energy are not included in fedgov's CPI i guess we are ok, there will be no inflation. (sarcasm)"

Just like houses doubling in 4 years didn't officially affect the "cost of living" index either.