Entry # 10 20600331

My Opinion/Summary:

The current oil prices are skyrocketing compared to forecasts made by so-called experts in this field. The oil prices have skyrocketed for a couple of reasons and one of them is called China. With China’s oil consumption rate rivaling that of the United States, more oil than predicted has been not available to the rest of the world, thus increasing the price per barrel that everyone else pays. This is not a good business strategy in any sense. Back in late 1990’s experts believed that at that current consumption rate the world had about eighty years of oil available. In the last couple of years, another study was conducted and found that only forty to fifty years of oil was left. This is due to the intense use of oil from both the United States and China.
Now I am not saying that China is to blame and that the United States is the only country that is allowed to use oil at those consumption rates. What I am saying is that the United States and China should be both looking for alternative methods of energy much more diligently and purposefully. Estimates say that we could be the first generation to go back to the horse-drawn carriage. After only a little over one hundred years, the world will deplete its entire resource of oil.
A great strategy would be to make a joint effort to find alternative sources of energy. This could solve the problem of increasing oil prices. This could also solve the problem of us funding terrorists in those countries in which we buy our oil from. However, that is a totally different argument and for a different topic.


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Article: Oil's Murky Math

Where are we headed: Up to $200 a barrel? Down to $80? With little good data on supply or demand, oil's next price move is anyone's guess

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by Peter Coy

At around $125 a barrel, crude oil has more than doubled in price since the end of 2006. How is it possible that the vast majority of government forecasters, stock analysts, economists, traders, and journalists who follow the oil market failed to foresee this? Moreover, how can it be that even today, the bulls and bears on oil are extremely far apart, disagreeing not only on the oil outlook but even the present situation?
The answer is simple. You can't predict what oil prices are going to do even in the short-to-medium term unless you have a good handle on the forces of supply and demand. And that requires thorough and reliable data—which don't exist. Regrettably, the world oil market is no more transparent than a fragrant barrel of extra-heavy Orinoco crude. And the situation is getting worse because the world's fastest-growing oil consumer is also one of the most opaque: China.
Contradictory Predictions
The scarcity of good global data is a key reason why it's impossible to know for sure whether the next "super-spike" in oil in the coming three or four years will be up to $200 or more…or down to $80 or less. Even though the statistics aren't exact, they're all anyone has to go on, so they still have an enormous impact.
On May 13, for example, the price of crude oil rose to a record close of $125.80 on the New York Mercantile Exchange after the International Energy Agency announced its estimate that inventories of distillate fuels such as diesel and heating oil in developed nations fell 6.7% in March from a year earlier. If inventories really are shrinking, it should be bullish for prices because it indicates that production isn't keeping up with consumption. That's certainly the viewpoint of oil bulls like Matt Simmons, president of Houston investment bank Simmons & Co. International. Says Simmons: "We have lousy data, but what data we have is somewhat scary." He sees prices hitting $200 to $500 in six months to four years.
But other experts say oil inventories appear to be at least adequate. While agreeing with Simmons that the oil market is "data-famished," analyst Edward Morse of Lehman Brothers (LEH) concludes in a May 9 report that "fundamental misperceptions" have caused prices to overshoot. He thinks crude could fall to $83 by next year, a one-third drop.
No Transparency
Chalk up the poor underlying data to a combination of gamesmanship and incompetence.
Oil statistics are reasonably good for the wealthy nations that make up the Organization for Economic Cooperation and Development (OECD), although even in data-rich countries like the U.S. there are unexplained discrepancies. But the rich countries matter less and less because their production and consumption are both roughly flat.
Outside the OECD, where the growth is, countries either don't want to divulge data for strategic reasons, or haven't yet developed the systems to collect and compile the necessary numbers. The Joint Oil Data Initiative, an organization launched jointly by producing and consuming nations in 2002, is supposed to improve matters. But the group acknowledges on its Web site that "the database is still far from perfection."
China, which has grown into the world's second-biggest oil consumer after the U.S., stands out as a particular problem. Just ask Eduardo Lopez, who tries to dope out the China market as the senior demand analyst for the Paris-based International Energy Agency, an affiliate of the OECD. He says China does not report demand, leaving him and others to figure it out from data on production, trade, and inventories. What's more, he says, "there are thousands of so-called teapot refineries all over China" that are technically illegal and therefore left out of China's official statistics.
Making his job even more trying, China appears to be creating a strategic stockpile of oil, but has never acknowledged it, Lopez says. If Lopez and others are underestimating how much oil China is squirreling away, then they're inadvertently overestimating true global consumption, and vice versa if they've overestimated China's stockpiling.
Speculation, Too
Many other countries aren't much better. Lopez says Russia produces "awful data" and demand statistics are patchy in countries like India and Indonesia. On the supply side, OPEC nations don't report their output reliably, sometimes because they don't want to officially admit they're producing above OPEC's quota. That leaves the agencies relying on unofficial "tanker trackers" like Lloyds Maritime Information Services and Petro-Logistics SA, a tiny company that operates upstairs from a grocery store in Geneva, Switzerland. OPEC members also jealously guard critical data about when new fields will begin production and how quickly existing fields are declining, says Matt Cline, an economist for the U.S. government's Energy Information Administration in Washington.
What makes good information so important in the oil market is that both the supply and the demand for oil are extremely inflexible, especially in the short term. That means even a small, unanticipated shortfall in output—from, say, strife in Nigeria—or a bigger-than-expected rise in consumption can send prices through the roof. On the other hand, prices can plummet if demand growth drops because of an economic slowdown or production jumps because some delayed project finally comes on line.
One indication of uncertainty is the extreme range of bets being made in the oil options market. On May 13, bulls were willing to pay around $1.40 per barrel for a "call" option that will pay off if oil goes over $200 a barrel by next February. Bears, meanwhile, were paying about the same amount for a "put" option that will be in the money if oil goes below $84 by then. Larry Chorn, chief economist of Platts, the McGraw-Hill Companies' (MHP) energy information unit, says the actual costs incurred in producing the most expensive oil is only around $70 or $80 a barrel, meaning that about $50 of the current price represents "the market's risk premium plus speculation."
In other words, there's a big slab of unknown built into the price of oil. Lots of people will confidently predict where prices are headed next, but most of them, including the bulls, have been wrong more than once. Truth is, the world is almost as starved for information as it is thirsty for oil.
Coy is BusinessWeek's Economics editor.