Stay the Course

…Oil prices are down slightly on the theory that the US economy is slowing and there will be demand destruction. Recent trade statistics show we are importing more of it and paying a higher price for it. People will not stop driving to work. The point to remember about oil is that it is priced in a global market. A barrel of oil in Australia or Japan is the same price as a barrel of oil in the US. The US has not contributed to incremental global oil consumption in over two years, as the market price has surged from the $60 range to around $90. So if the US falls into recession, how much demand destruction will actually take place, and will it really have an affect on the global price of oil?

The incremental demand is coming from Asia, and from the producing countries; the Middle East, Russia, Venezuela, Mexico etc. due to domestic growth and subsidized prices. Growing domestic demand in these areas will likely cut into export growth.

The other side of the coin is supply. The US is now highly energy dependent, unlike the days of yore. The US now imports approximately 70% of its energy (oil, natural gas and refined products). According to the SERA report, world oil depletion is running at 4 million barrels per day. Matt Simmons believes that figure is very conservative. In Mexico for instance, as the Cantarell oil field depletes rapidly over the next 10 years, and domestic demand grows as well, where will the US get the lost supply? Canada