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High Oil prices are here to stay in 2008
By Edward Tapamor
PARIS (ResourceInvestor.com) -- High energy prices will not go away. Despite the fall in equity markets, despite the turmoil of debt and credit markets, despite the growing numbers of people thrown out of jobs.
Despite the fact that data in the United States has been amazingly weak this week, with stock builds all over the place - including a 7 million barrel crude build and a 10.6 million barrel build in products – the price will not budge.
One reason of course is the continuing fascination with the Chinese and Indian economies, which are subsidising energy consumption for their people and businesses. This state of affair, especially in China, prompts fury from the ‘free market’ whackos. They say this distorts a market, forgetting that every action of government and society distort markets, you know, things like wars in the Middle East.
The story is that if the Chinese state was not being so terrible and letting their people have energy rather than starve then Americans and Europeans would be able to drive to the supermarket for less cash per tank of gasoline. It makes perfect sense if you are unable to see beyond your own nose.
Indeed it would be a good point but in fact the Chinese state are subsidising their people and simultaneously also taking extreme measures to curb, not promote, energy consumption. Across the country in major urban centres, such as Guandong, railways, electricity generation and even factories are being forced to stay closed for long periods to conserve precious fuels.
The factories have the goods that they want to sell, they have the buyers, but China would rather stymie its own industrial output than put further strain on the energy complex. The fact is a Chinese person uses the same amount of energy as an American citizen did in 1904. There will be no way to make up the gap in the short term. We all know that.
So rather than trying to blame everyone else the U.S. and Europe could take a long hard look at its profligate waste. This would be the real way of refocusing economics away from the mantra of ‘growth’ - another ridiculous lie that funnels money to the richest – and towards sustainability.
The other problem, outside of ‘free market’ whack-jobs and OECD wastage is OPEC. OPEC is not likely to loosen the spigots on their fields any time soon, even if they could raise output, which some observers doubt. The oil they have in reserve - maybe 1 million barrels per day, maybe a bit more - does have a few more customers than a couple of years ago as refineries have been upgraded to take heavier types of crude oil. But there are still not enough of those complex refineries and the ones that exist are mainly positioned in stronger economies where there is an approaching refining capacity glut.
OPEC will now protect an $80 per barrel floor price; it will claim – possibly quite truthfully – that they need that level of cash in order to develop all the difficult-access resources they now are left with. As a side example the Brazilian field Tupi – not an OPEC field of course – is likely to be the biggest field found in the world in recent times.
But it will be very expensive to extract the oil as it is in deep waters off the Brazilian coast under a thick but brittle salt coating. OPEC countries are faced with extracting resources from similarly difficult terrain.
The result means only a severe economic downturn can push the oil price down around $60 per barrel for any length of time. Yes, we may see $60 in 2008 but it is difficult to see how it would be sustained in the face of Chinese demand and OPEC tightening supply. Can you see the stagflation round the corner?