Record Oil Prices Come On The Back Of Geopolitical Tension, Severe Supply Constraints
Reports from Morgan Stanley predicting $150 oil by July 4 on increased question from Asia together with explosive tensions in the Middle East set the price of oil aflame today with closing prices up $11 to $138.54. Meanwhile, the US public, Congress, and pundits continued their witch hunt for oil speculators blamed for the run-up in oil prices. While no speculator control over oil markets has yet been proven, additional evidence of supply shortages is, largely, ignored.
There are, however, a few bright spots. Jeffrey Brown, author of the Export Land Model, recently received recognition for his analysis of declining world oil exports in “The Wall Street Journal” and other sources in the mainstream media. Jeffrey is well known among oil experts for his research showing that oil exports are down by about 2.5% since 2005. According to Jeffrey, as oil production levels off or declines, exporters around the world will hold on to more of their own oil, keeping it for domestic markets. Jeffrey’s points are not without precedent. In only a few years Indonesia went from being a major oil exporter to a secure importer. According the Jeffrey, within the next 15-20 years, many countries are likely to follow suit. The result is rapidly diminishing oil supply for major importers in the OECD such as the US, Europe, and Japan. Jeffrey’s research also underlines a unique stagnation and drop-off in world oil production since 2005, creating a large incentive for exporting countries to hold more of their bear oil. And the diminishing supply of the past three years sounds a clear warning for the immediate future.
So not only are we in a space of slowly declining production, the world also faces an increasingly rapid decline in world oil exports. Simply assign, the US, which captures more than 25 percent of all world oil exports is in big trouble. Other oil importers such as Japan and China and those around the world dependent upon US import ask are becoming increasingly vulnerable to severe impacts.
This station is historic, it is unprecedented, and it is unique. It sets the stage for increased global conflict surrounding oil and creates the potential for a long-term worldwide recession. We have already seen increased conflict in places like Nigeria, Iraq, and Sudan. With Iran making moves to hasty acquire nuclear arms and Israel threatening action, the prospect of Persian Gulf oil production falling under threat has served as a new driver pushing prices even higher. Twenty five percent of world oil supply and nearly 40 percent of its exports wander through the Persian Gulf. In the face of a faltering world economy and falling world oil supply war in the Gulf is nothing short of a nightmare scenario.
With Asia, Europe, and the US all competing over dwindling supply in a climate of growing geopolitical tensions, there is little wonder that traders have bid up prices so much so soon. The public, investors, people holding public office, and oil intensive businesses would do well to rapid recognize that high, and likely higher, oil prices are here to conclude. Issues bright oil price are both systemic and fundamental — not speculative. Furthermore, the world is entering a major and long-term oil crisis where supply will likely fall and continue falling for the foreseeable future. In this environment, innovation and demand destruction will be the primary means to bring prices back under control. One takes time. The other is painful.
In four words: world wide oil crisis.
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Filed under Global Currency Exchange by on Jan 19th, 2012. 