what's with the price of oil?

Oil prices should be heading north, not south
Friday, November 14, 2008 | 08:15 AM ET

By Deborah Yedlin, business columnist, Calgary Herald

It is certainly a sign of the times when the International Energy Agency publishes a study showing the risks of underinvestment in oil and gas projects around the world and oil prices respond by dropping more than $3 a barrel.

But so it is when market psychology is overwhelmingly negative and short-sighted.

The numbers released on Wednesday by the IEA demand further reflection. In a nutshell, the study says that the global energy industry must invest $26 trillion US between now and 2030 in order to meet future energy demand.

That works out to about $350 billion a year.

And hereâ??s the sobering thought: The industry plowed back that amount in 2007, but it still fell short of what was necessary to add production and reserves.

The IEA says the major fields around the world are declining at annual rates of closer to 9 per cent, not the 6 per cent many had been using as benchmarks. This means more money has to be spent in order to keep production constant.

Compounding the problem is that a dollar spent today doesnâ??t yield the same results that it did five years ago. While part of this is due to the fact that costs have gone up around the globe, the other piece is that the world has run out of the easy places to find and develop reserves.

The trouble, of course, is that with oil prices falling like a stone, the last thing companies are thinking about is expanding capital expenditure programs. If anything, the current environment is about conserving cash - and even paying down debt so that balance sheets are stronger.

One of the reasons oil prices fell as much as they did on Wednesday was because the U.S. inventory report was released, along with predictions that oil demand would continue to fall in 2009 by almost 2 per cent.

While this is indeed a sign of an economic contraction, the fact is consumption in the U.S. isnâ??t what itâ??s all about any more.

The developing nations outstripped the demand growth for oil back in 2005; the future of energy consumption lies in the hands of China, India and the Middle East. The only factor that would tip the balance and chop energy use in any of these regions would be if fuel subsidies were eliminated. And thatâ??s not happening any time soon.

The real worry, then, is that without meaningful investment the world will face a supply crunch when the economy pulls out of its current funk. This will push prices up to the point where they could consume as much as 7 per cent of GDP in the developing countries and 5 per cent in the developed world.

More dollars going to meet energy needs is never good for economic growth or inflation.

If markets had stopped to study and digest Wednesdayâ??s IEA report, they would have realized that oil prices should be heading north, not south.

2 months ago I watched Donald Trump say that oil was going to hit $35 a barrell this winter. I thought he was out of his mind.lol He's smarter than he looks.
Its all good news as far as I'm concerned. The oil companies have spent nothing on upgrades or new refining plants for decades. They had billions of dollars in profits and spent none of it except for fat salaries.

it's a bit like the energy crisis in the 70's...after making record breaking profits, the oil corps are pulling out of development projects that would help keep the price of oil down...it doesn't hurt them if it *seems* like there isn't enough supply to feed demand

Gas prices are low for now....
by the summertime prices should be back to their usually high :(

prolly not this time. I have a friend that is a commodities broker. He tells me that the speculators were behind the price of oil shooting up in the first place. The speculators had a bet on which one of them would break the $100/bbl ceiling. It appears that the speculators have been taken to task for it. The question I have is who's money are they playing with?? All commodities trades have to be paid in cash at the end of each day.

i wonder how the speculators were taken to task...maybe hank paulson fired a warning shot across their bow by reducing their government handouts by a couple billion bucks

The largest speculators were those that had the capicity to store large volumes of oil when they are be purchased. Short term speculators, usually those without the storage capacity, had very little impact on oil prices. Instead, it is the big firms such as airlines, commerical transportation (fed x, ups), and other large firms that depend on oil, were able to direct the market up.

For example, airline x would buy a future contract for say 100,000 barrels in November of 2009 at a locked in price of $150 per barrel. The reason they would do this is the fear that oil might be at $200 per barrel at that time.

That way, the firm would be able to sell the 100,000 barrels at $200 per barrel, using the profit to offset the cost of fuel when oil is at $200. In the first quarter of 2009, we will see these contracts beginning to surface when oil is considerably lower. This situation will serve as a lesson to those who over-capped their hedge, which is why this industry is self regulating.

Oil rich countries who cut production when the price is low are playing with a double edged sword. Yes they are securing future potential margins, but they are also significantly reducing their income, and causing unrest as people lose their jobs when production is cut back...

Thats all i have to say about that:jointsmile:

Oil is a perfect example of why there should be no such thing as a futures market. They need to put the stock market back to basics. Nothing but stocks. No futures market,no hedge funds,no commodities market. All these do is artificially inflate the price of commodities.

there is an important role for the futures market, but they need regulation to stop pure speculation from driving the market

this guy offered some good advice for reform of the futures markets:
http://hsgac.senate.gov/public/_files/052008Masters.pdf
http://energycommerce.house.gov/cmte...-testimony.pdf