June 19, 2008

Oil Economics 101

Katy says: - In today's class, we will discuss current events in oil markets.

- China raised fuel taxes by as much as 18 percent. Markets interpreted this as a serious move toward cooling China's ever-growing energy demand, and fuel prices duly began falling. This came on the same week that Honda unveiled the world's first commercially available hydrogen fuel cell car.

- Iraq awarded important oil contracts to US and European firms in order to ramp up production. The Iraqi government expects to increase production by 500,000 barrels per day in the next six months. Improved security in Iraq's oil fields and pipelines has Big Oil grinning.

- Saudi Arabia - the only member of OPEC with any capacity to spare and, not coincidentally, the largest and most powerful member of the cartel - announces it, too, is ramping up oil production to respond to the insanely high price of oil. They expect to increase production by 500,000 barrels per day in the next month, all this on the heels of a visit by US Pres. Bush in which he asked the Saudis to increase production. The Saudis rebuffed the President, but have seemingly changed their mind. They have also called a meeting of oil producers and consumers to discuss ways of cooling down oil markets.

- Venezuelan oil minister Ramírez, in a telling sign of the increasing strains in the cartel, announced our country will boycott the Saudi meeting. Among the stated reasons is a visit by the President of Brazil, whom he seemingly meets twice a month. A funny excuse when you consider that Ramírez's Brazilian counterpart will be ... in Saudi Arabia.

So, children, a little bit of homework. Solve the following equation:

Slowing demand + increased supply + breakdown of cartel discipline = ??

a. A perfect storm; prices will plummet.
b. A minor blip in the unstoppable march to $200 per barrel.
c. Who knows what's happening with oil markets?
d. All of the above.

Class dismissed.