note: I cannot get access to Flickr from work, so you'll have to go see the graphs that accompany this diary on the original post over at the European Tribune. My apologies for the inconvenience.
Oil prices are breaking records so often these days that news papers have to rewrite their stories twice a day to keep up, right now. The NYMEX prices broke through the $85 level yesterday, closed above $86, move above $87 this morning and are now hovering, as I write, just below $88...
Oil surges near $88 a barrel
Oil prices rose to fresh records on Tuesday, with US crude surging near $88 a barrel, and pushing gold to a new 28-year high as investors feared a spike in inflation.
The threat of a Turkish military operation against Kurdish militia in northern Iraq contributed to the oil price increase, but traders said the main factor of the rally was low US inventories, strong demand and a timid production increase from the Organisation of Petroleum Exporting Countries.
The short term variations of the price are to a certain extent random - they are spur-of-the-moment reactions to news on various fronts, as suggested above - OPEP declarations, inventory numbers, geopolitical events - while the mood on the currency markets as well as reallocation of funds throughout financial markets can also play a role. But what is more striking to me right now is the following combination:
- regularly increasing oil prices have still not had any visible impact on worldwide growth numbers;
- all players have brutally changed their expectations of future prices, and brought them to levels close to current prices.
I discussed this in an earlier Countdown diary, but recent news have confirmed this, with French oil giant Total now increasing its internal hurdle rate to $60/bl (i.e. it will invest in projects that require oil to be higher than $60/bl on the long term to be profitable - see slie 15 of this (big pdf) corporate presentation), and others increasing their medium term price assumptions.
What these two tidbits suggest is that oil is still cheap. Its price is driven by strong demand growth and not, as in previous oil shocks, by (artificial) supply shocks, and the continued, regular, increase suggests that investments in places like China are still worthwhile even with higher oil - and other commodity - prices.
As these investments drive up demand, prices will have to go high enough to dissuade them, unless supply can keep up, which seems improbable right now, as this chart shows: production has been flat for almost 3 years now, as per official statistics.
In fact, I personally think that the oil price increases have actually allowed the financial asset bubble to survive another year, by providing yet another source of easy financing: revenues from oil exports have extracted more money from households around the world; in the West, as that spending is basically compulsory, it has to a large extent been financed by increasing debt levels; meanwhile, those huge inflows could not be all spent in the oil producing countries, and had to be recycled in the financial markets - mostly in the form of investments in US Treasuries, thus keeping long term interest rates low and making the debt financing easier for their customers. Of course, by financing their customers on easy terms, the oil producers have worsened the already massive global financial imbalances - and have acquired funds large enough to make them players in our markets - buying, via their Sovereign Wealth Funds, companies and assets and not just State debt. Right now, we're selling jewellery to pay for our fix.
But the price is still not high enough to make us stop. It seems that until we actually have to sell the house, we won't even slow down our craving for the black stuff. And $100 still won't be enough.
Earlier Countdown diaries:
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact