Tuesday 21st June 2005 AD

FUNDAMENTALS 101 

When launching our current enquiry into Global Energy, we commented that "today's world is highly dependent and geared around a commodity that is becoming increasingly scarce, and further, all the evidence suggests that the rate at which energy is becoming scarce is likely to accelerate". So today's question: What will that do for prices and why? 

As we send out today's Daily Dig, crude oil is trading at a record high of $59 per barrel and natural gas prices in the US are at near record levels of $7.00. 

How often when talking with family and friends does the question of increasing prices come up? Likewise it is not unfamiliar to hear workers in a given sector complaining about low prices for their commodity and the resulting poor wages and profits. 

The pricing mechanism in an economy is something that is relatively simple, but very often overlooked. In simple terms, markets ebb and flow between "surplus" and "shortage". Where the market currently sits between these two extremes determines "price": 

1) When the market trends toward "surplus" prices will fall. The MORE there is of something (supply) and the LESS people want it (demand), the greater the SURPLUS and the LOWER the prices will eventually become. 

2) When the market trends towards "shortage" prices will rise. The LESS there is of something (supply) and the MORE people want it (demand), the greater the SHORTAGE and the HIGHER the prices will eventually become. 

No matter how we approach our examination into future energy markets and prices, all the reliable and levelheaded evidence points to us moving towards the second of these two scenarios. Of course there are opposing viewpoints, and some with a degree of merit, and these too we will consider as we dig into the supply/demand fundamentals. 

Tomorrow we kick off our analysis of "demand" from the streets of Panama City. 

Best Regards 

Philip Judge
pjudge@anglofareast.com