Why has the oil price stayed above $100, when all other commodity classes have shown larger falls?
The gold price has fallen significantly more than the oil price as the dollar gained ground in recent days. There appears to have been a decoupling of the dollar-oil movements that we saw through March. To me, this implies that gains in the oil price are not based on monetary reasons alone: it implies something more fundamental is going on.
A US energy economist has a neat explanation as to why this is happening – and it fits exactly with my view of the world. It’s all about population growth leading to energy shortages – and he believes it’s hitting oil-producing nations hard.
Writing in the Financial Times, Ohio Northern University Energy Economist AF Alhajji, said that OPEC’s vanishing excess capacity was now keeping the oil price above $100. He argued that the Gulf States’ power crises were now a primary driver of the oil price.
Consider the exports
Alhajji argued that when considering total oil stocks, you must include inventories in industrial nations PLUS excess capacity in producer states. We all seem to focus on US oil inventories – but we should be looking at capacity in producing nations too. Despite rising inventories; vanishing capacity in Gulf nations makes total global oil stocks so small that this has been the main driver keeping the oil price above $100, he argued.
So, based on this analysis, when we are considering global oil stocks, oil EXPORTS from these countries are the most important factor – NOT total oil production.
Rising living standards, soaring populations and urbanisation is increasing demand in oil-rich nations. They are using their own oil to supply their soaring energy needs. This would also explain why OPEC has been reluctant to increase production – it simply can’t because of its own power shortages.
A lack of infrastructure
In March, the Middle East Economic Digest warned of an imminent power and water crisis across the Gulf. It said there was a serious supply and demand imbalance caused by a lack of infrastructure investment earlier in the decade.
The GCC is currently building a Gulf power grid that will connect the six member states, paving the way for a regional electricity market. The grid will not come online until 2009, however.
So, a temporary change in the dollar’s fortunes has revealed that fundamentals are taking over as the main driver. Cheap oil really has gone forever.
This article is taken from Garry White’s free daily email ‘Garry Writes’.