[Rhodes22-list] Economics - Like $100 Barrel Oil? Get Used To It

[Brad Haslett]

I know, I know, Bush/Hitler controls the oil markets and with the right
'nanny' in charge we can fill our tanks for free and "a chicken in every
pot".  In case you didn't sleep through econ101 or don't have terminal BDS,
you might find this interesting.  Brad

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OPEC Sees A Payday

By INVESTOR'S BUSINESS DAILY | Posted Monday, January 07, 2008 4:30 PM PT

*Energy:* OPEC assured the West over the weekend that $100-a-barrel oil
isn't too high, given global demand. But what it really sees is that with no
U.S. drilling ahead, Americans must be perfectly happy with such prices.
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Related Topics:
*Energy<http://www.ibdeditorials.com/FeaturedCategories.aspx?sid=1812>
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OPEC, a cartel that controls oil prices by controlling production, could
lower those prices if it wanted. Its biggest and most influential member,
Saudi Arabia, is so productive, and has such high-grade petroleum, that it
can provide crude in almost any amount its interests dictate. Along with its
high-producing neighbors, it has a major influence on what consumers pay.
[image: Khelil: OK with $100 a
barrel.]<http://ibdeditorial.com/IBDArticles.aspx?id=284601277866408#>

Khelil: OK with $100 a barrel.

Having long experience in oil markets, Saudi Arabia is a rational player. So
when OPEC's new president, Chakib Khelil of Algeria, signaled no interest in
hiking production to cut prices because $100 crude "is not necessarily very
high," big producers were effectively saying there's nothing out on the
horizon that could stop them.

As high as oil prices are, they must be thinking, the U.S. is obviously
willing to pay them. How else to explain the unwillingness of its
politicians and public to increase domestic production, one slam-dunk move
that would bring prices down.

OPEC, and Saudi Arabia, which can produce oil very cheaply no matter what
the world price, will lower prices if they can raise the comparative costs
of offshore drilling to preserve its monopoly. But right now they have no
reason to do it.

More drilling, and even the threat of more oil drilling, will lower the cost
of oil faster than any "alternative" energy solution. But in the high U.S.
presidential campaign season, it's much easier for politicians to instead
blame private oil companies.

None of the Democratic presidential candidates has mentioned stepping up oil
drilling in the outer continental shelf or Alaska National Wildlife Refuge
as a means of addressing the high prices Americans pay for gasoline. In
fact, most explicitly oppose it.

As for the Republican presidential candidates, most tread gingerly, although
Fred Thompson and Rudy Giuliani on Saturday did slip in references to
developing "domestic oil" and "using oil reverses" amid other suggestions to
how they would deal with the energy crisis. But we have yet to hear the word
"drill" out of any of them.

Meanwhile, candidates such as John McCain and Hillary Clinton, along with
powerful politicians such as House Speaker Nancy Pelosi, say the solution to
high energy prices is wind power, subsidized ethanol and conservation.

But getting these experimental solutions online is too far off in the future
to avoid what would provide a real brake on energy prices — a full-blown
recession.

Cambridge Energy Research Associate (CERA), a top oil forecaster, reports in
a Jan. 4 advisory to clients that, with oil in the uncharted territory of
$100 a barrel, we may have reached that point.

"The all-time inflation-adjusted high (for oil) was in April 1980, when CERA
calculates, crude oil hit $99.04 per barrel in terms of 2007 dollars," the
forecaster said. Today's prices are reaching even higher levels.

World oil demand will increase by 1.3 million barrels a day in 2008, CERA
estimates, and U.S. inventory levels have fallen 18% since July. That
imbalance, plus instability in oil-producing countries such as Nigeria and
new demand from countries such as India and China, improve the odds that
prices will go even higher.

Bloomberg News and The Guardian report that some speculators have put money
on oil reaching $200 by the end of 2008, likely betting on a catastrophic
disruption in a big supplier. The 5,533 options to buy at that price amount
to a 10-fold rise in two months.

The Saudis know that oil could tumble if a recession hits a major buying
region. But they aren't going to help those who don't think there's a
problem with prices at the current level. If America won't drill, then
America must be calculating it can weather $100 oil without recession. Is
that really the message we want to send?