Commentary 7/8, 2006

Published Aug 14, 2006
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What’s Your Excuse?

It’s probably no surprise to anyone that a quick glace at current headlines inevitably reveals yet another declaration concerning the price of oil. In some ways this should be no surprise – as a commodity, the price of oil is of continuous interest to traders. And over the last 30 years we’ve seen a number of price spikes on several occasions due to very real, long-term crises that occurred when demand outstripped supply.

And right now is no exception, right?

Yes, it’s true. Turmoil that threatens supply – at whatever link in the supply chain – is the fodder of today’s headlines. The oil-price rollercoaster has been giving us a wild ride lately. Hostilities in the Middle East are probably the first events that come to mind. The potential threats to the production ability of the world’s largest suppliers certainly is worrisome. Also at the beginning of the chain, the production shutdown at one of the largest oil fields in the US state of Alaska has also been pointed out as a cause behind a jittery market. It’s not difficult to think of any number of examples that threaten production – kidnapping, sabotage, the weather, to name but a few.

At the other end of the supply chain, we have seen more of our share of headlines concerning threats to facilities such as refineries and pipelines. Right now it’s the hurricane season in the southern Atlantic, and almost any report of a possible storm can mean rising oil prices. Such storms can threaten Gulf of Mexico production, but possibly even more worrying is the threat to the refineries that dot the Gulf Coast of the US. A possible break in that supply-chain link often boosts the market.

Another source of oil-price nervousness is when politics come into play. Some have claimed that Iranian President Mahmoud Ahmadinejad’s fiery rhetoric is in part intended to keep oil prices artificially high (this may be an outcome, but one can wonder if this is intentional). Russia’s threat to turn off the gas to its neighbours last winter has now become the stuff of legend. And the West is not exempt from such logic twisting.

Some political banter in the US can lead one to think that high fuel prices are the result of a foreign conspiracy, (much to the chagrin of Canada and Mexico – the US’s closest neighbours and suppliers of approximately a third of the oil used in the country). In a recent radio broadcast, the Mayor of New York City, claimed that the cash the US pays for oil is used to fund terrorism.

In a very real way, these headlines are just making excuses – post hoc logic to try to justify the ever-higher prices (just as price drops are often attributed to “profit taking”). We should try to take a step back and try to focus on what is the underlying reasons behind the price of oil.

All the shrillness – whether the result of war, natural disaster, politics or plain warped logic – captures the popular imagination, distracting from an underlying truth that should be addressed. The issue of demand should be addressed more fully, because the gap is beginning to become more apparent. No matter how much we pay for oil, how many refineries or pipelines we build, or how much exploring we do, the demand will outstrip the supply.

Many of the major oil companies have revised their future production figures downward in recent months, including Statoil and Hydro on the Norwegain Continental Shelf. This is due in part to a tightening of regulations. But it also signals that at current production rates, with current know reserves, we will find that demand will be more and more difficult to meet.

So we must bridge the energy gap – and a good place to start is to acknowledge that a problem exists.

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