Friday, October 10, 2008

Bad Move, Camel Jockey

Somewhat lost in all of the hoopla surrounding the current stock market crash (and yes, with the market down 21.8% over the last seven trading days, we're technically in a "crash" phase) is the fact that oil prices continue to decline. Oil is currently at about $83/barrel, down more than 40% from its recent peak of about $147/barrel.

There are two general reasons for this.

(1) Much of oil's run-up to nearly $150/barrel was fueled by investment funds speculating on a continued rise. As these funds' stock positions have come under pressure, they have liquidated some of their commodities holdings as well. This has put some downward pressure on oil prices.
(2) More importantly, as the credit-related economic slowdown in the United States now appears to be global in nature, people are lowering their forecasts for economic growth in 2009, thereby reducing demand forecasts for oil. Even for China and India, the two rapidly expanding economies that were seen as most responsible for fueling oil demand over the next couple of years, GDP growth expectations have been lowered. With lower overall demand now forecasted, prices have declined.

Of course, OPEC played more than a small part in the price increase, gleefully counting their petrodollars, while ignoring the need to increase production to help moderate prices. While in the short run this increases revenues for the sheiks, providing money for their profligate lifestyles (hey, it costs a lot to send 30 of your children to Harvard), it also plants the seeds of their economic troubles down the road. Their goal should be to keep oil prices high enough that they can turn a tidy profit, but low enough that consumers don't change their behavior, especially over the longer term.

However, as we've seen here in the U.S., when oil/gasoline prices reach a certain point (apparently, that's about $4.00/gallon), the light bulbs above everyone's heads suddenly go on, and we begin to think about conservation. It's already been happening in the U.S. No one seems to be buying those gas-guzzling SUVs anymore. The dealers can't give them away. Everyone is focused on getting better gas mileage. People are driving less.

We've already seen the impact of these behavioral changes. Gasoline consumption in the U.S. is set to decline in 2008, for the first time since 1991. That's pretty rare. Since 1945, annual gasoline consumption has fallen from the previous year's levels only 8 times (1952, 1974, 1979, 1980, 1982, 1989, 1990, 1991). If you're interested in lots of energy-related statistics (and which cool person isn't?), visit The Department of Energy's Energy Information Administration's web site.

The interesting thing to me is that the decline in gasoline consumption we're witnessing in 2008 is mostly short-term and reactive in nature. In other words, we haven't yet seen the larger, long-term impact of the behavioral changes. The average gas mileage of the U.S. vehicle fleet has only begun to creep up. It will take a few years before the majority of the drivers in this country have a chance to switch out their gas guzzlers for more fuel-efficient vehicles. Think about it this way: How many of us have traded in our vehicles? On the other hand, when we do get our next vehicles, what are the odds that we will end up with something more fuel efficient? It's pretty likely. And, once we do switch, we're not going to get rid of our vehicles for less fuel-efficient ones as soon as gasoline prices fall.

Therefore, I think that we're entering a multi-year period of declining gasoline consumption in the U.S., much like in the 1979-1982 and 1989-1991 periods. Some of that will be a function of a weaker economy. However, the secular trend of more efficient gasoline consumption is bound to be longer-term in nature, and will continue even after gasloine prices moderate. This signals a problem for OPEC and the other oil-exporting nations.

I'm not ready to say that we'll see a return to $10/barrel oil, but I'd expect to see oil at about $50-$60/barrel by this time next year, and would expect us to get closer to $30/barrel not long thereafter. Who knows, maybe we'll start to read some articles in a year or two about unfinished construction projects and empty office buildings in Dubai.

Clearly, these people know more about blowing things up than they do about economics. Hopefully, if their oil revenues decline, they will have less money to fund those types of terrorist activities in the future.

And perhaps Mahmoud, Jabeer, Saleem, Alal, Kawid, Traweez, and Babaganoush should consider applying to non-Ivy League schools.

1 comment:

Anonymous said...

Mr. MBB,
I will have you know that Camel Jockey is a horrific slur on all peoples of Araby, be they Sunni, Shiite or, Allah forbid, non-Muslims. We will not tolerate such vituperations and calumny. My righteous indignation burns within me with the heat of a thousand suns.
I will have you know that we are working diligently to reverse generations of prejudice against our people. For this reason, we are using many of the billions of dollars your nation has sent us to build cultural and educational institutions on our holy soil. And just to be safe, we are also snapping up assets in the Great Satan of the United States at prices that our (unfortunately Jewish) bankers assure us are not overinflated. Then you will see the triumph of Islam's truth as your most cherished cultural icons are purged of their stains from your culture of licentiousness, prurience and pangamy. Except Angelina Jolie, perhaps. And maybe Meagan Fox.
In addition, there are several investments that Arab nations have undertaken in recent years to stimulate tourism and broaden the horizons of Western infidels. The only problem is that they are extremely expensive to maintain and, according to our Jewish bankers, are really only NPV-positive (isn't that a medical term?) when the spot price for oil is over $140 per barrel. As such, we will be coordinating an OPEC production cut as soon as practicable. This move, our Jewish bankers assure us, will help immensely and will certainly not result in fewer net dollars flowing into our oil-soaked coffers (though I must admit that their math seemed a especially esoteric on this last point).
In short, mend your ways or prepare yourself. We have forged an especially sharp scimitar to mete out justice to and “bloggers” and other fomentors of the lesser elements of your people’s nature. Allah has blessed us with another opportunity that our Jewish bankers are very keen on: credit default swaps.
- Mr. Mashtin al-Kir, Minister of Information, Arab League