As 2009 kicks into gear, market forces are being sidelined by a policy tug-o-war between Barack Obama and OPEC.
Both parties are hoping for the U.S. and other nations to escape depression conditions and pull out of recession rapidly. And in an efficient commodity pricing system, economic recovery in heavy energy consuming countries would drive prices back up naturally.
As it stands, though, OPEC-Obama tension is thickening by the day, clouding the real supply-demand scenario.
First, understand that in order to offset natural declines from Mexico to Saudi Arabia to the North Sea, new investment poured into exploration and production over the past few years.
Exchange-traded fund OIH, which is comprised of oil services companies, gained 70% in 18 months on that action, doling out healthy dividends along the way.
Then the credit crunch and stock market plunge combined to drain what had been ample investment capital, leaving us in a precarious position today.
Oil execs confirm the disjointed state of the market as we start 2009. They’re terrified of a protracted recession but unable to ramp up capacity if the economic sun shines anytime soon.
"If the economy recovers," says Helge Lund, the CEO of Norwegian oil giant StatoilHydro (NYSE:STO), "we won’t be able to meet the increase in demand."
At the same time, OPEC has achieved what the New York Times calls an "unusual degree of compliance" from its member states. The oil cartel has logged 3 million barrels per day in output cuts since the bottom fell out of crude prices late last summer.
OPEC is continuing a frantic push to put a $70 floor under oil prices. Oil producers are partly acting to counterbalance improvements in non-fossil fuel sources like sugarcane ethanol and hybrid electric power, and of course they’re fighting natural demand destruction that comes with less economic activity in consumer states.
Beyond those factors, though, oil states and their petrocrats may be more worried about the Obama Administration and its first energy moves.
Oil Outlook 2009: Obama’s Efficiency Push Could Destroy More Demand
Less than a week into his presidency, Barack Obama has already made a major move away from George W. Bush’s energy policy by putting efficiency standards back in the hands of states.
On January 26, Obama directed the Environmental Protection Agency to review waivers to California and 13 other states, to let them set their own emissions standards. That means they’ll be outside the framework of the Clean Air Act, which established federal guidelines on tailpipe exhaust for cars and light trucks.
The Bush Administration refused waivers to those states on grounds that Washington’s gradual increase in fuel economy standards was sufficient.
Obama’s shift could lead to further long-term demand destruction and possibly even offset a natural rebound in oil prices that would stem from a recovery. His ultimate goal may be as much as a 40 mile-per-gallon standard for most automobiles, which would put a damper on oil demand indefinitely.
Yet OPEC is keeping hope alive when it comes to doubling prices in the next 12 months.
No matter how fuel standards are discussed—sometimes emissions, sometimes efficiency—the simple math points to an uphill climb for OPEC as Obama moves forward.
Digging Deep for Money, Not Oil
Persian Gulf oil monarchies like the Saudis have been trying to spread wealth around in various investments in recent years. Sovereign wealth funds invested heavily in properties that were already inflated, and individuals like Saudi Prince Walid bin Talal, got smacked in their own ventures (his Kingdom Holding Company just posted a $8.26 billion quarterly loss after investing in Citigroup in 2008).
Saudi royals and others saw the writing on the wall in alternative energy’s development and mounting political opposition to foreign oil’s dominance. Their attempts to diversify went sour, so now all they’ve got left is frantic output cuts.
So Iran and Saudi Arabia are both talking about unilateral cuts beyond what the cartel requires, and the whole group of 12 OPEC member states are deathly afraid of running prolonged budget deficits—they don’t have economies to speak of, other than petroleum exporting.
Saudi Arabia and others will be digging deep into their coffers in 2009, even as the drilling rigs fall quiet. Look for that, not demand restoration, to be the main motivator of oil price increases in 2009.
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