Cheap Oil Will Not Last Long.

The recent slump in the price of a barrel of oil to less than half its peak of almost $150, last July, has caused those of a more cornucopian persuasion to crow, "so where have all the peak oil enthusiasts gone now?" This is a tragically mistaken point of view, which assumes, as economists often do, that the markets control everything and that low prices mean abundance of a particular resource. Hence following this line of thinking, everything is now hunky dory.

Of course it is far from that - by the way, congratulations to President Obama for his landslide victory, having secured about two thirds of the "college votes", although he will have an unenviable job on his hands to resolve the many issues facing the United States and indeed the world - since we are still shuddering in the nakedness of the Emperor's Clothes that the world financial system has been shown to be. Cold winds still blow and accordingly, the cheap oil has arisen from reduced demand in consequence of a fall in economic activity. Scared banks won't lend to each other or to businesses and the world is still relatively flush with oil as a result of OPEC producers having been persuaded to up their output to get oil prices down, otherwise the West particularly would face economic debilitation, and the producers too, once their western customers could no longer afford to buy oil from them.

Well, we have seen a crash, really it was a case of the proverbial straw breaking the financial desert animal's back - the massive oil prices of just a few months back, pushed up the load on a financial system that was already shaking at the knees of its burden, and clothed only in the fabric of credit. In short, if accounted for in terms of real solid collateral, there is more money on the world's books than actually exists, hence a levelling-down of the stockmarket probably to somewhere nearer reality. The global economy must restore faith that more institutions will not unexpectedly collapse, and get money back into its true role which is "currency" to oil the wheels of commerce.

Some independent analysts have predicted that oil will stay below $100 a barrel while the world continues to sort itself out amid the fallout of the credit crash. However, the amount of oil being produced still runs close to the demand for it, and hence we are at a proverbial tipping point, where the balance could weigh in either direction. Personally, I don't see any likelihood that it will tip towards cheaper and cheaper oil, because of the geological reasons of the nature of oil wells and that many are becoming increasingly exhausted (or will become so during the immediate time to come) , and it will be harder and more costly to recover oil from them.

The only phenomenon that could keep oil prices down for any significant period is a worldwide and protracted recession, so closing the gap of demand against supply. Eventually this must open-up again, as we get through more oil and to the tipping point of world maximum (peak oil) output. Both the Chinese and Indian economies are roaring ahead but I note that neither are immune from the credit crunch, and China has seen a downturn of around 9%. Simply, if the West can no longer (or is very cautious to) buy their cheap manufactured goods, there will be no incentive to make them. Hence a downturn in these economies seems inevitable.

I sometimes think that the machinations of globalisation are something like a group of mountaineers attached to a single rope, with all being similarly tied together, beit banks, business or the economies of entire countries or continents - if one slips, the team can take up the strain and all may still make it to the top, but if a few of them fall, they all do. By design or default the winding-down of the global machine is at hand, and I suspect it will be by default because who will be brave enough to call a halt to their own part in its march, unilaterally? That would simply be like cutting oneself free of the rope and jumping off the mountain, and no one is that altruistic... or foolhardy.

Related Reading.
"Oil executives, political leaders say decline in oil price will not last." By Adam Schreck, chicagotribune.com, (November 5th). http://www.chicagotribune.com/business/sns-ap-ml-gulf-oil,0,5975386.story