What Market Made an All-Time High in 2011?

01/27/2012 6:30 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Even though it did not make the headlines, there is one market that made an all-time high in 2011. MoneyShow’s Jim Jubak shares his explanation of this surprising fact.

No headlines, no hoo-hah, no big furor, but oil prices hit an all-time high in 2011. You probably didn’t even notice.

The all-time high is for something called average price for the year, and we’re looking at one particular grade, Brent, which is the European benchmark. For the year 2011, Brent came in above $100, which is an all-time record, and close to $110. It finished the year at $107.

So the average for the year was higher than it’s ever been. The high before this was back in 2008 at around $96 a barrel.

What’s really extraordinary about this is not the difference between $96 or $107 or $110, but that at a time when you’ve got a global economy that’s in a slowdown, and when there’s plenty of oil roaming around the world, one would think that you wouldn’t have an all-time average high. And you’ve sort of got to go, "OK, so why is this happening?"

I mean, oil prices probably would have gone down at the end of the year because Libya’s oil supply came online faster than people expected, and that was really only balanced by the scare over the Straits of Hormuz and the Iranian threat to close it and about 25% to 35% of the world’s oil. Seaborne oil travels through that strait, so that propped up prices at a time when they might otherwise have been going down…but the really intriguing thing is why they stayed above $100 when demand was declining.

To figure that out, you have to look not so much at the oil industry per se, but at the economics of oil-producing countries such as Russia and Saudi Arabia. What’s really happened is that these countries have gotten hooked on the high price of oil themselves.

They have put forward government budgets that depend on oil being at $100 or more a barrel for the budget to be balanced. So the result of that is that you have countries that have basically been in favor of more production, such as Saudi Arabia, now coming to OPEC and saying, "We think the minimum price for a barrel of oil, the price at which markets behave well or the world economy behaves well,"—which is nonsense, but that’s the explanation—"is $100 a barrel."

It’s up from $75 or $80, where it used to be. But if you look at the Saudi budget, they need $100 a barrel to balance their budget, because they gave away so much money to in subsidies and payments to try to head off any chance of Saudi Arabia following Egypt and Libya in the Arab Spring.

Russia has the same situation. They’ve got a budget, which again, depends upon $100 a barrel oil, because they are providing so much in the way of subsidies to an economy that’s barely creaks along except for oil.

So if you look at that, the $100 a barrel threshold for Brent crude—and it’s likely that we’re going to be over that again in 2012, and maybe even more depending on what happens about supply and demand underneath—but that $100 a barrel seems to be with us to stay.

It’s not because of supply and demand, not because of the difficulty of finding oil, not because of the expense of finding oil, but because oil producers need it to stay in business as governments themselves.

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