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Arthur Berman: Why The Price Of Oil Must Rise

January 11, 2016

Arthur Berman: Why The Price Of Oil Must Rise

Why a supply shock is inevitable

Geologist Arthur Berman explains why today’s low oil prices are not here to stay, something investors and consumers alike should be very aware of. The crazy-low prices we’re currently experiencing are due to an oversupply created by geopolitics and (historic) easy credit, not by sustainable economics.

And when the worm turns, we are more likely than not to experience a sudden supply shortfall, jolting prices viciously higher. This will be a situation not soon resolved, as the lag time for new production to come on-line will be much longer than the world wants:

The same things that always drive prices in the end it’s always about fundamentals. The markets are peculiar and they change every day. But the fundamentals of supply and demand at some point markets come back to those and have to adjust accordingly. Not on a daily basis, maybe not even on a monthly basis. But eventually they get it right. So this oil price collapse is really straight forward as far as I can tell, and it has to do with cheap stupid money because of artificially low interest rates that resulted in over-investment in oil — as well as lots of other commodities that are not in my area of specialty, but that’s what I see. And over-investment led to over-production and eventually over-production swamped the market with too much supply and the price has to go down until we work our way through the excess supply.

Now the wrinkle in all of this is that because the supply excess/surplus was generated by debt and a lot of correlative instruments, the problem is that the companies and the countries that are doing all this over-production need to keep generating cash flow so they can service the debt, which means they have to continue producing pretty much at the highest levels they possibly can which doesn’t really allow very much room for reducing the surplus.

…click on the above link to read the rest of the article…

Oil Shocks And The Global Economy

October 23, 2014

Oil Shocks And The Global Economy.

Here I re-tread a well-trodden path, but with recent events in the oil market I thought a brief recap might be timely.

I begin with a photographic illustration of a typical US demand response to the tripling of oil prices that occurred during the first “oil shock” in 1974:

Oil Shock 1974

Demand response after a tripling of oil price, USA, 1974

Those long lines of gas-guzzlers were indeed a demand response, but not to the oil price increase. They were a reaction to the nationwide shortage of gasoline caused by the oil embargo that accompanied it. Americans, like George Patton’s tanks during the Normandy breakout, just gotta have gas. And still do.

Fluctuations in oil price, particularly “oil shocks” are nevertheless believed to have had a major impact not only on the US economy but on the global economy as a whole since 1974, and here we will revisit some basic macroeconomic data to see how well this contention holds up.

…click on the above link to read the rest of the article…

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