For the benefit of anyone living in a Marpi cave, and thus devoid of financial news, I’ll note that oil has been sleeping in the high $80s per barrel bed, and is flirting with the $90 level.
Rising oil prices are like an on-coming train: Even if you see it coming, you can’t stop it. Households and small businesses cannot realistically hedge against oil price shocks; true, there are financial products for doing this, but that stuff isn’t on Homer Q. Public’s radar screen.
The pain in the CNMI has been minimized by Mobil and Shell retailers, who have actually taken it easy on the consumer. Gasoline on Saipan (at $3.529 per gallon) is within 4 percent of Guam's price (at $3.399). Not a bad deal in my book, all things considered. But I'm taking a global view today, so we'll worry about Saipan's case, and how it might screw it up, in a future column.
As for the big, global picture, which is what sets oil prices, my take is this: I don’t think this sky-high price is based on organic fundamentals of supply and demand. No, I think it’s largely based on a massive risk premium because of all the worries and weirdness in the Middle East, which is to say, geopolitical risk.
So, here are my dots to connect: (1) This premium is rising, and (2) this premium is set by very sophisticated players in the markets. The price of oil hasn't just arbitrarily been bid up; by contrast, some smart folks must be concerned about something genuine, or potentially genuine, out there.
This leads to yet another dot: (3) If this premium has driven oil up to almost $90 a barrel, it can easily, in the blink of an eye, drive it well beyond $100 a barrel, because the very type of risk that this premium addresses can balloon instantly.
Sure, there are other factors at work. The falling dollar is one. Strong Asian demand, Chinese in particular, is another. Still, it seems to me that the oil market is, well, whacky.
Just to infect your brain with more weirdness (thank me later), I’ll note that hiccups in natural gas processing have led to an acute scarcity in (ready for this?) helium, which, here on earth, is captured as a by-product of natural gas extraction. Helium’s chief use is in MRI machines, and, Bubba, if you need an MRI machine, you really need that sucker; it’s often life or death stuff. I’m not saying that MRI machines are going to be unplugged, but this is just one example of how “fossil fuel” (natural gas, in this case) is ultimately related to every doggone conceivable aspect of modern life, whether we see it or not, and whether we like it or not.
Anyway, back to oil. If prices remain this high, we’ll all just spend a bit more and save a bit less. But if this volatile commodity goes ballistic, then every element of modern life is going to blow up with it, and spending a bit more won’t even be an option, because there won’t be much to spend it on. We’ll be all foraging for coconuts.
So maybe hiding out in a well-provisioned cave doesn’t sound so bad, as we contemplate a Mad Max world. I ain’t saying it’s going to happen, but if you’re looking for something big to worry about, and the global warming trend has gotten so mainstream, even bland, that it’s lost its trendy edge, then oil paranoia could make for a wonderful hobby. Believe me, you might have plenty of company soon.
It won't take a “shortage” of oil to create a nasty spike; I think this market could (not “will,” but just “could”) freak-out based on mere fear, which, basically, is what a risk premium is, right?
Right.
How could that happen? Well, stay tuned for that, too. There is a lot to discuss here.
But in the meantime, if you want to discuss oil prices, I’ll waive my fee and I’ll take San Miguel beer in barter, since I’ll be provisioning my cave.
I’ll also be securing the perimeter. So keep your hands where I can see them. And don’t forget the password.
(Ed’s column runs every Friday. Contact Ed via his web site, TropicalEd.com.)
Home | Weather | Advertising | Classifieds | Subscription | Contact
Us | About Us | Archives
©2006 Saipan Tribune. All Rights Reserved
