Thursday 30th June 2005 AD
HOW TENDER THE BALANCE ? 

While $60 oil has come suddenly, unexpectedly and with much complaint by many, it is no real surprise to our valued Daily Dig readers. We have been saying for several years that Energy (oil & gas) is set to become increasingly scarce and therefore expensive in the days ahead. 

At other times we have said that all of life and nature is a delicate balance, and the economies in which we live are certainly no exception. For example there is the tender balance between; "Supply vs. Demand" ; "Buyers vs. Sellers" ; "Regulation vs. Free-market" ; "Price vs. Consumption" and so on. 

One of the most delicate of all balances, and one that is often overlooked, is that between ABUNDANCE vs. IMMINENT SHORTAGE. History is full of dramatic examples of rapid change from abundance to shortage, usually with staggering social and economic consequences. We have been quietly suggesting that such a time is upon us again as we move from a world of cheap energy to one of more expensive energy. 

On the phone with a client today he asked the question; "How much higher can oil prices go - isn't this market being driven purely by speculators now"? "Sure", I replied, "like any advancing market there is some speculative activity here, but I believe this market is primarily being driven by the FUNDAMENTAL realities of limited SUPPLY and increasing DEMAND, and prices will continue higher" 

Our reasoning is simple; it is the tender balance that exists between PRICE vs. CONSUMPTION. The timeless principles of economics show that the higher prices reach, the lower the demand will become (less people are prepared to purchase at higher prices). Yet looking at the energy sector we see that globally "demand" is increasing, unabated by higher prices. 

One year ago, analysts were predicting that $45 oil would cause a sharp decrease in global consumption (with a high chance of global recession), yet demand has continued its steady rise despite price.

 One good example of demand is U.S. refineries, which in the last week have been running at a full 97% capacity. The "Lundberg survey" tracks gasoline prices from 7,000 petrol stations in the United States. Last week it reported prices up an average of 8 cents a gallon across the USA for the two-week period ending June 24. 

It is uncommon for oil to rise in June, particularly coming out from such a high May prices. Some commentators are beginning to see that, for now at least, these price levels for oil and gas have very little to do with slowing down the world's insatiable demand for energy. 

We will soon see what the effects of $60 oil will be on energy demand. If, as we suspect, the tender balance between Price vs. Consumption has not yet kicked in, and demand does not decrease significantly, then higher prices MUST follow. 

In the days ahead we will begin to consider some of the geo-political shifts that are likely in tomorrow's "higher energy economy" 

Best Regards 
Philip Judge
pjudge@anglofareast.com