With every bit of news about instability in the Middle East, oil industry analysts get on TV and tell us that the price of oil is going to go ever higher. On one of the cable networks yesterday, I watched (with some annoyance) a discussion of gasoline hitting $5 a gallon. Over in the UK, International Development minister, Alan Duncan, stated “if there were a terrorist attack in the Arabian Gulf, it [the oil price] could go up to $250 [a barrel] … Anything could happen.” Mr. Duncan used to be an oil trader, so his opinion carries extra weight with the press beyond that of a government minister. But I think a hefty portion of skepticism is in order.
Among my many sins, I used to be a foreign currency trader. That was so long enough ago that my trades included deutschemarks, pesetas and guilders, and I have been in recovery for about 15 years. Admittedly, I was not particularly good at it, but I learned a few things that certainly apply to the current petro-problems.
First, there are numerous systems that can give you a future price of any commodity. They work great until they don’t work at all. Traders and analysts can talk about Fibonacci retracements and stochastic analysis till they are blue in the face, but these “work” only so long as no unforeseen events arise to undermine them.
Second, traders and analysts talk their book. That’s a useful Wall Street expression that means they talk up what they have bought, and they talk down what they have sold. They aren’t being manipulative or evil necessarily (but a few are). Rather, they are showing off how clever they are. They aren’t much different than the stereotypical 1950s housewife bragging about the deal she got on pork chops.
Third, they generally make their industry more important or interesting that it probably is. This is their profession, and they need to be excited about it. What excites them, though, is much different than what excites the rest of us. It takes less to get them hot and bothered. Any analyst who says, “forget my industry. I see no opportunities in it” is looking for a pink slip.
Fourth and finally, they never ever give you a decent time frame. I believe in my heart of hearts that Mr. Duncan’s $250 a barrel prediction is accurate. Someday, oil will trade at that level. The trouble is in determining if that will happen in 2011, 2012, 2020, 2030 or even 3020.
Let’s look at some facts. The Saudis still have 3.5 million barrels of daily excess supply capacity. The strategic oil reserves held by developed nations is a huge buffer amounting to 3 months supply of imports. If not a drop were imported, we’d still be good for 3 months. International Energy Agency boss Nobuo Tanaka stated last week, “We can release 2 million barrels per day for two years. We don’t really have to worry too much about the supply side.”
Now personally, I figure we will set a record for gas prices this summer. That’s going to hurt, but I don’t think it’s going to be the end of the world. Nor do I think the price spike will last. I could well be wrong. That’s the difference between me and Mr. Duncan – he could be wrong, too, but as one of Her Majesty’s government, he can’t say so.
In short when you hear talk about oil hitting $250, maybe it would be more credible if it were to trade at $150 first.
