Oil Futures

The best I can tell from reading news bulletins this morning is that oil prices have a $15/barrel risk premium built into them. Oil prices, adjusted for inflation, remain about 20% below their 1981 peak after the fall of the Shah in Iran and during the Iraq-Iran War. Iraq oil production remains below its pre-war level. (Remember the good old days when the war would cost $70 billion and could be paid for by increased Iraqi oil production?)

The failed reconstruction effort in Iraq and the continued instability of the country indicate that no relief is in sight on risk premium and production from that quarter. The US’s relations with Iran continue to deteriorate. Bombing them will effectively eliminate them as a supplier to the US. Venezuela increasingly seems a more volatile supplier, and the Bush Administration has no desire to repair relations with Chavez. The Russian oil industry is a powerful force in that country. Putin can be expected to use that as a playing card in international relations when things don’t go his way. Remember he recently cutoff natural gas supplies to the Ukraine. Add to that problems in Nigeria, unstable regimes in other OPEC countries, and the fact that, after all, the US is dealing with a cartel, and you can see the risk premium going beyond the $15/barrel level.

Then there is China, whose demand is rapidly increasing. China is cutting deals with countries like Venezuela, Iran, and Cuba to assure a cheap supply of oil to their high growth economy.

How much more wiggle room remains in the price of oil and its risk premium? Given the current state of international relations, discounting the risk premium seems like the wrong side of the bet. What’s Soros saying? He’s predicting higher prices, but at what level he will not say.

The current reaction by the President and Congress to the large increases at the pump are born out of political desperation before the midterm elections. Energy analysts are unanimous in saying none of the measures proposed will have an effect on gas prices.

Should I get my $100 gas rebate check, I’m using it to help buy an oil future. Or I might buy a couple of tickets to the Cubs game. I can take the Red Line train up to Wrigley for the low price of $3.50 roundtrip.

The market fundamentalists, who advocate war as the solution to international relation problems, are temporarily skewered on their own pike.