$20 Oil Is On The Table Again: Can Obama Pull The Israeli Rabbit Trick?

The bears are out again and there is talk of $20 oil; the logic is:

* All the oil stored up in super-tankers will flood the market.
* World GDP growth is low and perhaps getting lower or at least not likely to rocket any time in the immediate future.

Actual constraints in the near, medium and long term are a subject of conjecture; everyone lies and the incentive to exaggerate production capacity and reserves is high (that helps get credit and boost share prices for the oil companies and they are the ones who work out the reserves, and it helps bump up OPEC quotas); the problem is no one lies consistently (if they did it would be easy).

The reality is that Mexico and the North Sea are running out, there is a theory that Saudi is running out too; and the oil-sands producers are not investing (they all got hammered by the drop and they are feeling sorry for themselves), and Brazil’s new fields are years away.

However there are political issues, the main changes in oil prices over the past fifty years were due to political rather than supply constraints.

The issue right now is that Saudi is debt free, UAE is smarting from what the crisis did to it’s SWF, but they have plenty set aside, either-way and whether the story about peak oil is true or not, there is a specter that it might be true.

For many oil producers including spendthrift countries like, Venezuela, which holds $75 billion or so of US Treasuries, the problem is a pile of Yankee Dollars that they don’t know what to do with. Cutting back on production for a while would solve that headache, so unless someone can make a good argument that a US Treasury “in the hand” will be worth more in three years or five years time, than oil will be “in the bush”- even after counting the anemic rate of interest, there will be a debate. Sure that’s debatable, but the debate is on the table.

The Saudi’s say they want $75, and chances are what Saudi wants Saudi is going to get, with long term prospects of rising oil prices (unless electric cars deliver what they didn’t deliver for thirty years), selling oil too cheap is just desperation, and many of the sellers simply aren’t desperate.

Seeking Alpha