OPEC produces 32 million barrels of oil a day. And that, it reckons, is enough. The oil price suggests otherwise.
Crude traded above $105 in New York. R.S. Sharma, the chairman of India's state-run Oil and Natural Gas Corporation told a conference that, "The $100 a barrel [oil] price is here to stay... If we look at statements from OPEC countries, when they say that $90 a barrel should be considered the floor price, it is a matter of great concern and anxiety. It is very disturbing for oil consuming countries."
What countries don't consume oil? Iceland maybe, with its unique geothermal wealth. But really, the oil price is "very disturbing" for anyone who uses energy, which includes pretty much everyone.
You reckon something has to give. The markets are reacting to lower interest rates in the States and in the dollar-pegged economies of the Gulf and China (even though China dropped its rigid dollar peg a few years ago.) Fed Chairmen Ben Bernanke is setting the world on fire with inflation.
High oil prices should curb demand, but that hasn't happened yet. There may be some good investment news in all of this. And no, we don't mean that it's great news for energy stocks, although it is. Higher oil prices are going to accelerate the race for substitutes.
Alternative and renewable energy had a dog of a year last year. Most sectors-except for resources-did. But with the oil price back on the boil... real commercial alternatives to getting energy from petroleum will probably get a second, third, and fourth look.
Solar, geothermal, fuel cells, wind, waves... the whole portfolio of energy projects comes back into play the higher the oil price goes. It's true none of these things replace oil's sheer versatility as energy. But nothing will. So if the marketplace is going to work, it will have to cobble together a coalition of the able to begin replacing oil's centrality in our industrial economy.
Don't expect it to happen fast, though. And don't be at all surprised if coal-dirty, dusty, black and villainous-plays a big role. Making fuel from coal by turning it into a gas and then liquefying it is old technology. But it will probably get a lot more interesting to oil-poor, coal-rich countries in the next few years. Nearly everyone has some kind of coal. Only a few countries have oil.
After taking its lumps earlier in the week, gold got back in the game today, up $22 in New York. How tricky is the gold market? One the one hand, you have huge investment momentum driving people away from bonds and shares into tangibles. On the other, you have a worldwide credit deflation, from which no asset is seemingly immune.
So which will it be for gold? Hyperinflation on lower U.S. interest rates? Or will the Mighty Midas metal be dragged down with property, shares, and fixed income? Reader comments below.
The Aussie market continues to whipsaw between surprising manifestations of the credit crisis... and higher metals and energy prices. We are reminded of an old Saturday Night Live skit where Steve Martin finds a tub of yellow goo. "Is it dessert or is it floor wax?" he asks. "It's both."
This market is dessert and floor wax too.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by dexter bland on 7 March 2008:
I am inclined to believe the OPEC line that it is the large flows of speculative money driving up the oil price rather than the true supply/demand fundamentals. The cost to produce a barrel of oil is still around $30 for most producers suggesting that far more marginal fields could be produced if the price stayed at these levels in the longer term.
Having said that I believe that we are starting to see a pay-off in recent investment in energy technologies. Particularly exciting are the advancements in energy storage such as lithium batteries that are enabling hybrids and eventually fully electric vehicles to finally become a reality. That almost all the major car manufacturers have this type of vehicle on the drawing boards is a sign that we could be looking at a genuine and lasting shift away from oil dependence. Electricity is every bit as versatile a form of energy if it is able to be stored effectively. It is much cheaper, lower in emissions, and can be generated from a diversity of sources depending on local economic and environmental factors.
Oil is having one final run but is sowing the seeds of its own destruction as it now has become uncompetitive - to add to the long list of undesirable effects it has on the world.
Comment by John on 8 March 2008:
Why would OPEC do anything when they're exchanging a barrel of oil for 105 pieces of paper that used to be worth an ounce of gold but now barely buy a tenth of that?
I don't think the real price of oil is going up just yet.
Comment by Richard on 9 March 2008:
It's Peak Oil, do a google search and find out what's going on in the oil market...
Comment by Paul on 21 April 2008:
Indeed Richard is right. Peak Oil is the prime reason for increasing oil prices.
Expect to see huge increases in the price of oil over the next few years and beyond.
An excellent intro to Peak Oil can be found at:-
http://www.energybulletin.net/primer.php
Comment by Diggin it! on 21 April 2008:
Don`t forget the stone age didn`t end becuase they ran out of stones! The oil age and prices will end before they run out of oil!
Comment by Captain Howdy on 21 April 2008:
There's no better cure for high prices than high prices.
Comment by mark the beekeeper on 27 April 2008:
just went to fill up my truck with diesel to find the price was $1.75 per litre . It is nearly at a point where diesel is approximately the same price per litre as the wholesale price of honey. Its time for me to find another life . I can go broke sitting on the beach enjoying myself . When we can make diesel out of almost anything what are we doing . time to say goodbye opec and do our own thing