Tuesday, June 22, 2004

U.S. and the World: It's A Gas, Man! It's No Joke, They're About to Turn off the Spigot

Learning the Hard Way (About Oil)

The oil markets have been talking, but no one is listening. A number of obvious clues have been given, but politicians and policy makers haven't a clue.

First, the law of supply and demand caused by the “fabulous growth of the U.S. and Chinese economies, has sent to price to fluctuate around $40 a barrel. Second, is the manipulation of OPEC, creating a “situation in which rising demand cannot elicit the increased supplies that would flow in a competitive market.”

Lesson One - It's no longer prudent to ignore OPEC, or to rely on its mercy.

Lesson Two- Profits are up in the United States due to the margin between crude oil and gasoline prices, yet refining capacity has not increased due to environmental and other restrictions preventing the construction of new refineries that were appropriate when oil was selling for $10 a barrel or less. These are no longer economically feasible. Change them now.

Another important message is the “persistence of the so-called risk premium of between $5 and $10 a barrel that seems to be built into crude oil prices. Part is a response to the continued disruption, for various reasons, of important producers. Iraq, Nigeria, Kazakhstan, Russia, and Venezuela. But the biggest and most important oil supplier is Saudi Arabia that sits on twenty-five percent of the world's known reserves, a supply that could “be tapped for the next 80 years without slowing down. And it all hasn't been found yet.

Conditions and policies in the Kingdom aren't favorable for continued supplies as the geriatric royal family, al Qaeda, and the Saudi public seem bent on a move away from the West.

This should clue us to the final Lesson: Prepare for the day when Saudi supplies are in the hands of al Qaeda, causing temporary major trauma. Take the necessary steps now.

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