Oil and leggy Texas blondes

About eight months ago, I warned in a column (“The Crude Cognoscenti”) that the CNMI was up against the specter of higher oil prices. And, voila, oil prices dutifully followed my prediction and commenced to climb towards the stratosphere.

There’s more than oil (gasoline) for your car at issue here. Tourists don’t float in on sail boats, they soar in on kerosene burning airliners, and higher fuel prices are an obvious factor to consider for our tourism industry. And a related factor is our airport fees policy, because somebody in the CNMI, somewhere, will hopefully figure out some day that gouging airlines with high fees might look clever on a sixth-grade level Excel spreadsheet, but, in the light of reality, will merely inspire airlines to look to more accommodating places.

In short, airlines are going to have sharper eyes than ever when fuel prices are high, when their customer base is economically pinched, and when Saipan can’t seem to figure out if its target market for tourism is Tokyo or Gorky Park. Little wonder that airlines are flying over Saipan and directly in and out of Guam.

Meanwhile, oil prices have spiked again and hit a 10-year high. Brent crude hit $32.28 a barrel, a level that brings to mind a common bumper sticker I used to see in Texas during the oil-slump: “Think $35 a barrel.”

Actually, at the time I was thinking about Joanne the Blonde Goddess, a leggy Delta Gamma from U.T. Austin, but not even this perfect creature was safe from the oil crunch. Her dad was a wealthy oil executive from Houston, and, like all dads, he hated the very sight of me, and, like all oil men, the price crunch had put him in a foul funk. Don’t let the sun set on ya’ in Houston, boy…

Oil’s long term price changes are largely driven by demand. That is, a growing global economy will require more petrol to fuel it, like a growing kid needs more bread (or rice, take your pick). But in the short term–like the price spike we just saw–it’s supply that’s the driving factor. Demand for oil didn’t change much over the past day, but the price spiked about 2.5%. The only other factor we can point to, then, is supply.

And supply is a dicey proposition, at least to the pros in the oil industry. The rumor is that U.S. stockpiles are at a 24-year low.
Meanwhile, OPEC may have mustered the resolve to keep a lid on production, which threatens to further crimp supply.

And there are, as always in economics, really two “supplies” at issue here. There is the real, physical supply, and the other is the “expected” supply. Markets for commodities–and oil is a commodity–are driven by expectations. In other words, even if the actual supply of oil doesn’t change one little smidgeon, oil prices will change as petroleum traders peer into their crystal balls and try to see what the future supply will look like, and, with it, future demand. In other words, they’re thinking ahead.

Thinking ahead–now there’s a concept! As for the CNMI, a bit of thinking ahead on oil prices would have helped, and an accommodating policy to airlines, for example, would have allowed us to try to keep a bigger slice of the air service and tourism pie. And we sure did have warning, since I issued it in this very space on December 22, 1999.