Should we be concerned about $110+ oil? Since the beginning of March, and noticeably after the March 11 triple tsunami-earthquake-nuclear disaster in Japan, oil prices have shot through the roof and show no signs of abating. Events in Libya have helped keep oil support levels high as well, but many argue this is no mere momentum or speculation play. Oil prices are being driven by increased oil demand and tightening oil supply.
This week, Fatih Birol, the chief economist at the IEA (International Energy Agency), a Paris-based organization that represents the world’s largest oil consumers, asked OPEC to raise oil production levels, arguing that the world has reached a “danger zone” between high prices and low economic growth.
As we get closer to OPEC’s next meeting on June 8, we can expect to hear more wrangling by IEA and similar calls from other groups. Now that the Northern Hemisphere is entering driving season (which typically begins in May), Birol notes that we can expect to see oil consumption increase by up to 3 million more barrels a day over the next few months.
That said, U.S. retail gasoline costs still aren’t expected to peak above $4/gallon until the summer.
West Texas Intermediate prices ended April 2011 at $113.93 (at 2.5 year highs), but the better measure of worldwide supply and demand is Brent – the oil benchmark of Europe, since Nymex WTI values are suppressed. Brent futures closed April at $125.89. As proof of this, U.S.-based Chevron is even turning to using Brent prices instead of Nymex in order to better capture the real costs of doing business with other countries.
In addition, Brent prices are the standard used in international trade.
Real Driver Of the World Economy
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While there is a great deal of merit to Jeff Rubin’s oil price theory of global economics, it seems to be more analogous to the “start/stop” function of brakes and acceleration in a car. Braking and accelerating determine the speed at which you go, but someone is also steering the vehicle in a certain direction. In terms of world economics, it seems that steering is in large part the U.S. Federal Reserve (as much indirectly, through exported inflation, as directly through domestic decline in the dollar).
Thus, we can’t completely blame Bernanke since oil prices do matter, but Bernanke is certainly steering and shaping much of what the real economy is giving us. In the meantime, you should just buy some solid Canadian energy stocks or the Canadian dollar and enjoy the ride.
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