Our bias is neutral/bearish on S&P 500 and crude oil, and bullish gold, writes Bill Baruch, Pres...
The Global Energy Shakeout Has Begun
07/03/2008 12:00 am EST
Peter F. Way, editor of Block Traders' Oil & Gold Monitor, says tight supplies and high prices are forcing major changes in the way the world buys and uses energy.
At a meeting of top dogs from the international oil industry and involved governments held [recently] in Saudi Arabia, the oil producing countries told the consumers they needed to shape up and stop being so wasteful in their consumption of petroleum and its products. But while we get our act together, they will be a stopgap for production interruptions caused by political or natural disaster disruptions elsewhere.
OK. Not what we wanted to hear, but message delivered.
Then they proceeded to whine about financial speculators driving the price of crude up.
Stop [complaining] and start applauding. The higher prices are the best cure for wasteful consumption. The cure has already started and will intensify.
Energy is consumed in every nation of the world from gluttonous USA to basket-case Bangladesh. The markets trading crude oil span the earth, seeing to it that necessary energy products are available everywhere at fair prices in comparison. Trading exists in price-spread contracts reflecting the shipping costs between ports only a few days apart. It's a very detailed and very active, essential market.
So, when worldwide prices rise the way they have on New York's NYMEX, the commodity's largest world market, it isn't because some evil nut from out of the mainstream is trying to hose everyone else on the planet. No, it is because all the consumers are becoming aware that the producing industry no longer has the capacity and the resources to satisfy worldwide demands at the current growth rates. And they recognize it's not going to get better soon.
The scramble is on to tie up scarce resources. Prices get bid up in the process. Want to put prices down? Sell the buyers all the product they can take, and then offer more into the market. If prices are truly believed to be too high, sellers should thrill at the opportunity.
But the reality is that the world is in the process of reordering its priorities in the sources and uses of energy. And that process will be shaped by the sensitive pocket-book nerve. Not a bad thing.
Some places need less realignment than others. Europe has had high gasoline prices for years, builds and uses economical cars far more than it does Lamborghinis, knows what trains are for and how to use them. The disciplines are already in place.
Other places have maintained self-deluding fictions like "no Hummer should ever go thirsty." Their adjustments may seem painful, particularly in societies that have forgotten -or never known-the frugality engendered by wartime experiences. A pity when they come to recognize they are in a war, as well as a worldwide competition.
Crude oil prices will continue to rise, unevenly, until production and finding costs per usable BTU equate with available alternatives. I don't know where that will be, but the markets are telling us that we aren't there yet.
Related Articles on MARKETS
While the yield curve recently inverted, there are no clear sign of an imminent recession, notes sen...
When news hits, the HFT algos react by buying or selling in the futures markets, writes Joe Duarte....
Should you be worried about Friday’s sharp decline, asks Kerry Given?...