Oil Price Woes

Yesterday, Saudi Arabia did what everyone--including George W. Bush on bended knee--has been asking it to do for months: agree to increase production.  Prices closed up a dollar.  The Saudi move and its non-impact on the market shows just how tight supplies remain.  While it was designed in large part to offset declines in Nigerian production due to rebel violence in the oil rich, poverty stricken Niger Delta, it might have sent a psychological signal of easing supplies but it did not.

Meanwhile, back in Washington, another panel of oil traders told Chairman Dingell's House Energy and Commerce oversight subcommittee that speculation is driving up oil prices and tighter oversight of commodities futures markets could lower prices. Staffers released data to the effect that 70% of trades are now speculative, up from 30% not long ago.

While Congress should act to shore up oversight of markets, the resistance of prices to downard signals shows just how difficult the problem of soaring commodity prices has become.  In related news yesterday, China which renegotiates major price deals annually, agreed to pay twice as much next year for iron as last.  As many commentators have written, soring oil and other commodities prices partially reflect the weak dollar.  But to a far greater degree they reflect real shortages created by the white hot growth of India, China and other developing countries that Fareed Zakaris has dubbed the "rise of the rest".

So what can we expect?  With oil supplies this tight, the markets remain hostage to any sudden supply disruption.  For example, an air strike on Iran's nuclear facilities--hinted at by recent Israeli exercises--if it affected Iran's supply of oil--could send prices higher.  So could more attacks in Nigeria.  Indeed, a disuption anywhere could have outsized effects.

Amid all the suggestions that America can drill it's way out of the crisis offshore or in Alaska, no one has mentioned the fact that Iraqi oil production--as a result of the war--is still about 400,000 barrels below what it was before the invasion--close to what the Arctic National Wildlife Refuge could be expected to produce at its peak in about 20 years.  The fact is, it is far easier to disrupt oil production than create it.

For all these reasons, the long term answer to hair trigger oil markets is to get off of oil.  As Tom Friedman wrote in a recent much-emailed column, increasing the addict's supply does not break the addiction.  Only a sensible, comprehensive energy policy to break the addition and exchange fossil fuels for a distributed network of renewables can end our dependence on this most interruption-prone and volatile of commodities.