Wednesday, June 02, 2004

The Washington Post overreacts a bit in its analysis today of what's driving global oil prices.
"What you're seeing is potential fears becoming reality, and that gets factored into prices," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation in New York. "It particularly gets priced when you're moving into peak demand season, and when capacity is fully utilized, and when there are no cushions to absorb surprises."

The upshot, as yesterday showed, is that geopolitical considerations are overwhelming supply-and-demand factors in setting oil prices. Based purely on fundamentals, such as inventory levels and planned global production, crude oil ought to be trading as low as $30 a barrel, many experts agree. So with additional production due, prices may fall somewhat in coming weeks, said Adam Sieminski, an oil analyst at Deutsche Bank in London.

"But if there's a fire or explosion at a refinery, or more terrorism in Saudi Arabia, the price will stay high," Sieminski said. "It's a struggle between the fundamentals and the fundamentalists."
Assuming that such a thing as "the fundamentals" exist and are the True Foundations of All Prices (poor Althusser -- the pilloried kettle called black by all the neoclassical pots), it's going a bit far to say that everything over $30/barrel is froth. Last month the consensus was that, at $40/barrel, $5-$8 of that was due to speculation and instability in the Middle East -- Iraq, Saudi Arabia, wherever. That would put the "fundamental" price of oil closer to $34/barrel.

Back in January/February, before the Mr Bush's War reheated but the winter heating season in the Northern Hemisphere was at its peak (thus roughly comparable to the changes on the global oil market wrought by summer in the Northern Hemisphere -- especially more auto traffic and formulated gasoline for environmental reasons), NYMEX prices were routinely in the $33-$35/barrel range.

Let's see what OPEC does tomorrow on resetting its official price band. This should give us a good idea as to what OPEC thinks the "fundamentals" are.

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