Oil Supply Certainty

The advent of fracturing technology, in addition to shale oil recovery, has cast a pall on the outlook for the traditional structure of the energy business. Present overproduction is, as we all know by now, causing financial pain to the many over leveraged explorers and producers in addition to those countries that have developed a dependence on a higher price for their oil exports, leading these countries to dip into their savings to sustain populations that expect a higher standard of living than may be presently realistic. The world price of oil is the result of expectations that develop over time regarding the future price of oil. This is best illustrated by the high prices that persisted only until lately in the grand scheme. Now, it seems that the whole investing world is resigned to a persistent oversupply and low prices for far into the future. Saudi Arabian spokesmen speak today of a refusal to decrease production and lose market share. The whole world seems to be waiting for a higher price for energy to pluck the bond holders out of the fire and rescue the emerging markets from their debt loads, not to mention the large international banks rumored and suspected of holding large positions in commodities. JPMorgan on the ropes today....

I think that world politics are being ignored. The middle east countries are selling some of the holdings of their sovereign wealth funds to raise money lately, but this cannot persist for long before cuts must be made to the standards of living their pampered citizens demand. In fact the turmoil we see in Iraq, Syria, Somalia, et al can be traced to a decline in the outlook by the poorest people in these countries. At the same time the western world is not dependent on the good will of these countries to keep the price of oil low due to the domestic production increases of recent years. The west is distancing ourselves from these countries and their monarchies and dictatorships. We are not willing to expend our blood and treasure to prop up these oil producers. In fact it is to our immediate benefit for supply from the middle east to be disrupted. Russia stands the most to gain from this dynamic.

In short, I think the oil investors are being typically myopic and perhaps missing the longer term real politik that influences the production and distribution of hydrocarbon energy worldwide.

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