Oil Bust?

I happen to agree with an article written by Matein Khalid on MENAFN.COM.  Matein highlights a couple of fundamental problems with the current price escalation. 

• Chinese imports are dropping

• OPEC production is up

• Alternative energy sources are trading at $18/barrel

The two parts I don't agree with are; oil trading below $20, I peg it in the 30s, and Bush making a play for Iran.  We (Americans) just don't have the patience for another Iraq, and Bush would be out on his ear.  Not to mention that the GOP would have a tough time being reelected next time.

But that not withstanding, the current price escalation is taking place at the wrong point in the supply chain.  Refining capacity problems should not drive up the price of crude. As I have stated before the end product price should be affected, and the suppliers of crude should be fighting over each other to get to that refining capacity, therefore driving the price of crude down, not up.

Comments

[Historian At Your Service]

If the price of refined products continues to rise as does that of crude, but the problem is not the refining capacity, then exactly what is keeping prices high? I admit my own ignorance in this field, but that is why I choose to ask questions rather than remain tied to my own limitations.

It seems to me that futures buyers who are being encouraged by biased media and ill-informed Americans everywhere are driving the price higher. Still, I am left to wonder if we don't have a case similar in some respects to that of 1929 - in that, speculation has gripped the global market.

Even with China's drop in imports, I fail to see good cause as to why refinery capacity has frozen. I'm left to wonder just how deeply the government and our Texas-based administration is in oil stocks, futures, and the very lucrative gains they will make when this is all over - when my children cry to me because their hungry and our economy has locked up because we made no effort to develop alternative sources of fuel.

It seems that Aristotle was correct when he stated that political men who are selfish and participate in government only for their own gain will ultimately bring the state to ruin.

[ThePef]

Thanks for your comment. I don't think we will reach some sort of 1929 panic.

Afterall we are talking about two different markets, one is based on paper representations, the other on hardcore assets. Prices are being kept high because people are trying to rationalize a growing demand, and dwindling resource situation. The problem is that most people play in the near term market, and are using long term market situations.

As mentioned in a previous post, retailers at ever increasing levels tend to absorb price increases until they reach a threshold, where profits are adversely affected. In the case of oil, the refiners are not taking advantage of the undercapacity situation for fear of government retaliation. The other thing holding them back is the fear of a true swing away from use of petroleum based products. This is not in their best interest in the long term.

The real kicker here is since the profit taking is not happening at the refiner level, it has migrated to the open market, the most visible market of crude. Since it has moved there, and profit is not increasing at the refiner level, excess profit is occuring at the source market.

So excess profit is going to the governments that supply oil. Of course it is in the best interest of Saudi Arabia to bump up production to max levels at this price, they realize it won't last. So, they are soaking as much as they can.

That is why I and a few others are saying the current price levels cannot be maintained. There does need to be transference of the massive profits being taken by the oil producing countries to refiners (more capacity - don't forget a refinery is an enormous investment of capital) and to development of alternative energies.

[Historian At Your Service]

Thank you for your in depth analytical answer. I appreciate the time and thought you put into your reply. Also, I'd like to say that those of you who post on this site should be applauded for your efforts to educate others on important issues that actually affect the rest of us. Wish some of the general population could pull their attention off of Michael Jackson and concentrate on issues of great gravity, like the oil situation. Thanks again.

[ThePef]

Thanks for the comments, they are always appreciated.