Commentary 3/4 2008 - Added Value?

Published Apr 18, 2008
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3/4 2008
3/4 2008

Suppose we were playing a guessing game. You might begin by asking: Animal? Vegetable? Mineral? If the word you were trying to guess was “Commodity”, the answer would have to be “Yes” to all three questions.

Think about the raw materials, agricultural products and other products that are traded in the various commodity exchanges around the globe. One main difference stands out when it comes to oil and gas. For the most part, oil and gas – when used to generate energy – are neither recyclable nor renewable.

Almost all other commodities traded, whether agricultural, livestock or metals, have the potential to be either reused or renewed. But once used, oil and gas are gone. It begs the question: At what price will oil be too valuable to burn?

Interestingly, the price of steel has spawned a futures market for recycled steel, and now ethanol is being traded as well. How soon before the mainstream energy markets include wind, wave, solar or other more sustainable energy sources have their own listings in commodities markets?

There are any number of theories as to why current oil prices have gone so high. Some say that in addition to tight supply and increasing demand, the pressure of commodity trading itself has pushed prices up. As traders have retreated from other markets, the possible profits from commodities have become more and more attractive. As oil prices move back from their highest mark, profit-taking is often cited as the cause.

But even if we attribute the influence of trading to 20 percent of the cost of oil, the price remains more than double that of not so many years ago. Supply and demand account for much of this price, with supply worries often getting the biggest headlines.

Many lament the fact that much of the world’s oil is found in regions where a lack of stability and transparency means deliveries are never certain. Civil unrest, coupled with the potential for natural disaster, means that the continued flow of oil can be interrupted at any time, contributing to price spikes. Although troubling, supply problems such as these are usually temporary, causing more annoyance than long-term hardship. The real trouble is in the future as demand increases.

Everyone agrees that world-wide demand will continue to grow as reserves are expected to diminish, so long-term high prices are to be expected. The curve, with its spikes and dips, will continue to move upwards.

What ever the reason, higher oil prices translate to higher prices at the pump, which have also had their share of the headlines. Rising fuel prices mean the cost of doing business is higher, which is passed on to the consumer. In the end, higher energy prices translate to higher prices across the board for all goods and services.

The markets are fickle. Not so long ago, we heard that higher oil prices (remember when the price first hit $70, $80?) could be absorbed by strong global growth. So as growth stalls, higher oil prices become an aggravation few are willing to disregard. Blaming the price of oil for economic problems is no solution. The economic reality is that more and more want to use a resource that’s getting harder and harder to come by.

So the industry will continue to work to extract enough oil to meet the world’s demand. The question is will the world behave responsibly with this limited resource?

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