Tuesday, October 14, 2008

What is the right price for barrel of crude?

Interesting blog entry on where the price for a barrel of oil should really be set - a break even point if you will for the countries that produce oil.

The author talks about where the price of oil should be in order for countries dependent on oil revenues to balance their budgets - countries including Venezuela. His guesstimate is from the high $50's to mid $90's. In fact, OPEC is meeting to discuss the output levels in order to control the price of oil.

What I think is missing out of the equation is what will happen if the price of oil continues a free fall. OPEC can control the output, but that is only one side of the equation. Demand is the other. If demand continues to fall due to the global economic crisis, OPEC will have to move to reduce output of oil even further to keep the price per barrel high.

I think though, that countries like Venezuela will continue to produce at the maximum output in order to fill their coffers with money. Oil is the only currency Chavez has. Sure, he's got aluminum, and some gold and diamonds, but oil is king in Venezuela, and Chavez needs those petrodollars to buy influence and look like the benevolent king. Oil is what feeds his socialist agenda, and he needs it more than anything.

On the flip side, if the world comes out of the economic crisis, maybe we'll learn to depend less on oil and spread out energy needs among other sustainable sources. I'm not a believer (term used intentionally) in Al Gore's theory of global warming with man as the main contributing factor, but I sure would like to not be dependent on foreign oil. I firmly believe that if the US were to develop it's own sources of energy and be 100% energy independent, it would re-institute us as the single Super Power in the world again.

As the saying goes, necessity is the mother of invention. With US automakers facing extremely tough times, maybe just maybe they'll start developing and producing ideas like cars that run on hydrogen, or even water. Take the US daily consumption of oil out of the overall oil demand equation and see what you come up with. Even the developing Asian markets wouldn't immediately replace that demand.

Chavez says Venezuela is insulated against the global economic crisis. Something tells me he missed a few macroeconomics classes. Just as Americans bet their houses on the continual rise in the price of real estate, Chavez has bet Venezuela on the continual rise or steady high price of a barrel of oil. As another saying goes, there is no such thing as a sure thing....

1 comment:

Jungle Mom said...

Chavez is scared stiff!!!