“Developing a comprehensive plan to achieve U.S. energy independence is the “single biggest” way to boost the economy. Oil is at the center of everything we do. If we produce more in the U.S. and use less and develop alternatives ... you allow the United States within our economy a half a trillion dollars more in GDP.”
FedEx (FDX) Chairman and CEO Fred Smith told CNBC
on Wednesday during a ‘Squawk Box’ interview
Welcome to the 40th anniversary of the First OPEC Oil Embargo. It made Sheik Yamani a household name, kicked off the first oil boom since the 1950s in the Permian Basin, led to the Second Oil Embargo, and the what is known as the Bust of 1986.
The recent price peaks in oil were as follows. (rounded)
April 2011 - $115.
March 2012 - $110.
August 2013 - $110.
The previous peaks were followed by a near $40 drop in 2011 and a $20 fall in 2012. For those readers technically inclined, this meant oil popped to the upper Bollinger Band and then plunged to the lower.
As I write this Wednesday morning Oct. 16, a deal has been struck to extend the debt ceiling and markets are rallying. Oil is positively correlated to stock prices, which is to say, it’s all one market. I doubt oil will now fall to the lower band, now at $95 with stock prices moving higher. The $110 peak was registered at the height of the Syrian panic. As that subsided, prices moved to their 125-day Moving Average now at $101.05.
Oil needs a daily close over $105 to turn the trend back up from the sideways to down position it now displays.
The International Energy Agency reports that world demand is now about 89 million barrels a day. Production is apparently near 92 million barrels, with OPEC recently actually reducing output. But really after watching and reporting on energy prices for years, supply and demand has little to nothing to do with the price.
Since 1980, world consumption has moved from 50 million barrels a day to the present 89 million. But in the last five years, oil has soared to $145 and then plunged to $35 per barrel. So in 33 years, demand has grown by 78 percent. But the price can vary by 414 percent in just one year. Gee, the price of avocadoes do not vary like that, why does oil?
The New York Mercantile Exchange, formerly known as the Potato Exchange, really got the ball — pardon make that barrels — rolling in the early 1980s. The NYMEX introduced a futures contract allowing one to take delivery of 1,000 barrels of oil at a specified time and price. And better yet, one need only deposit a small down payment, known as initial margin of less than 5 percent, to play in big leagues with the J. R. Ewings of the world.
Today there are 1,824,929 contracts at 1,000 barrels each outstanding. That translates to 1 billion, 824 million, 929 thousand barrels of oil. That translates into about 20 days of world oil production. The Saudis have never quite understood how we can trade more oil than exists but hey, that is America on credit after all. Such barrels are known as paper barrels. Traders typically close out the contracts, selling if long or buying if short before the delivery date.
Markets are rallying on the news that the USA will add another $1 trillion to our existing $16.39 trillion debt ceiling. I am guessing our prolific spending president, unconstrained by an actual budget, will top out that level within one year. This is only possible since the U.S. dollar is the world reserve currency. Hence, the Treasury and Fed print what everyone wants.
Yet the price of copper and rare earth metals languish while oil soars. I suspect we are nearing the end of the rise in oil prices with a peak due early next year. Until then, with a nod to the Andrews Sisters,
“Roll out the barrel, we’ll have a barrel of fun.
Roll out the barrel, we’ve got the blues on the run.
Zing boom tararrel, ring out a song of good cheer.
Now’s the time to roll the barrel, for the gang’s all here.”
Dennis Elam is an assistant professor at Texas A&M San Antonio and a 1966 graduate of Andrews High School and blogs at www.themarketperspective.com