WHAT is the connection between the women and children being bundled over the Syrian border and the price of petrol at your local garage? How could it be that Syria, a country with no oil, might affect the price of that most precious of commodities? There have been many internal conflicts in Syria, yet not one has ever affected the price of oil, so why now?
Yesterday, as I filled my car and listened to the radio about the acrimonious OPEC meeting in Vienna, it was clear that if these petrol prices don’t stop going upwards we — not just in Ireland, but also all over the world — are going to grind to a halt!
But why should petrol prices be going up?
Traditionally, petrol prices have been demand-driven. This means that the greatest single impact on the price of petrol is world demand. If the economy of the globe is expanding, the demand for petrol rises and the price goes up. The world and his wife are now worried about the fact that the global economy is slowing down following two years of printing money in the US and on the cusp of what many now believe to be a major wobble in China. So should the price of oil, be going down?
What else is going on?
Maybe the first thing to look at is the trend over the past 30-odd years.
It is easy now, after having a decade of high oil prices, to consider that oil has always been expensive. But that is not the case. In fact, if you look at the oil price since 1985, you see two distinct periods. The first period, from 1985 to 2003, was characterised by oil prices being quite low and not particularly volatile. More interestingly, the price of oil hovered around a median price of $19 a barrel.
Since 2003 this stability has left the oil market and prices have shot up and down all over the place. The main thing to note is that the median price of oil in the past eight years has been $60 a barrel. So we have had a threefold increase as the likes of China and India have come into the world economic picture. Think about this. The US with 5pc of the world’s population consumes 25pc of the world’s oil. China with 25pc of the world’s population only consumes 9pc of the world’s petrol. This will change over the coming years and will rebalance to reflect population with dramatic ramifications. But for the moment, the one aspect to consider is China is here and is consuming.
The other factor is OPEC’s reaction to political and economic shocks. Consider, the rebellions in the Arab countries — particularly, in significant oil producers like Libya. Libyan production has been decimated. Traditionally Saudi Arabia, as the world’s largest producer and the world’s biggest reserve of oil, has on three major occasions increased production to offset any politics-related drop in production to maintain global prices. First in 1956 when President Moussadeq of Iran nationalised Iran’s oil supplies, then again in 1979 when the Ayatollah came to power and finally, in August 1991 after Saddam invaded Kuwait. Each time, Saudi replaced the lost oil and prices stabilised.
But this time Saudi Arabia has not replaced Libya’s lost oil production. Why the change in Saudi policy?
Two things are affecting the Saudi behaviour this time. The first is a collective memory of the Asian crisis in 1997. Following the Asian crisis and in respond to pressure to ease oil prices to facilitate a global recovery, the Saudis increased production. But, because global demand was so weak, the oil price fell and it didn’t recover. It fell to below $10. This low price of oil caused Russia, which depended on oil revenues to pay its debts, to default in August 1998. This further weakened the price of oil and scared the Saudis because the lower the price of oil, the lower their revenues and the bigger their budget deficit.
So the Saudis lost their appetite to bail everyone out and this memory lingers.
Add to this searing experience, the events of the last few months and you will see why the price of oil will remain above $100 a barrel for a while.
When the first revolutions of the Arab Spring emerged, Saudi Arabia, a family dynasty, realised that it had to react. It saw that, for the first time in Arab countries, repression didn’t work. The more the old regimes repressed the common people, the more the people came on the street. Plus the preponderance of Facebook, Twitter and YouTube meant they couldn’t suppress the message.
A young leader of the Egyptian revolution who I met recently at a Google conference explained the role of social media to me succinctly,
“We advertised on Facebook, organised on Twitter and told the world about it on YouTube.”
Seeing the fate of Mubarak, the Saudi royal family decided to kill any incipient revolution with kindness. It spent money on all sorts of welfare payments. This meant spending and continuing to spend.
Brilliant research conducted by the Centre for Energy Studies has put one figure on what the price of oil has to be for the Saudis to be able to afford this new policy of killing the revolution with kindness. In early 2011, it was $74 a barrel minimum at a production level of $8.5m at day.
Now consider the cycle; the Saudis need this as a minimum price to keep the welfare rolling, this puts upward pressure on your petrol pump price.
The resulting revenues generate a budget surplus in Saudi Arabia.
But that’s not all. The ongoing trouble in Syria makes the Saudis nervous. Syria’s government is reacting like Egypt’s did, but social media and 24-hour news is telling the world that the Syrian army is terrorising defenceless women and children. TV stations like Al Jazeera are beaming this into Saudi living rooms and, for the first time, Saudi women are seeing other Arab women leading the demonstrations.
This scares the royal family so much so that they have increased welfare spending again to buy off their population. This escalating cycle of spending, Arab street violence, media coverage and more spending, is causing the Saudis to require a bigger budget surplus each coming year.
The experts at the Centre for Energy Studies have indicated that next year the Saudis will need a minimum price of $91 a barrel at higher levels of output to have enough money to buy peace at home.
WHEN you link up all the bits of the global oil and politics jigsaw it is not difficult to see that the Arab Spring, which is to be welcomed by all of us who value personal liberty, is coming at a huge price to Irish car drivers.
Obviously this is not going to change anytime soon. More liberty over there, means less growth over here — hardly ideal, but that’s the way the story goes when you are completely dependent on oil.
David McWilliams hosts the Dalkey Book Festival this weekend. On Friday night, there will be an in-depth discussion of the Middle East.
Irish Independent
The research by the centre of Energy studies wasn’t so brilliant, as they say: “In early 2011, it was $74 a barrel minimum at a production level of $8.5m at day.”
That implies a production level of 115,000 barrels per day whereas what they meant was 8.5 million barrels per day.
Thinking of taking matress money and putting it into U$dollars. Any thoughts on this? Anyone?
We can’t control the price at the pumps, but we can control how many km/l we get from petrol/diesel. I get just over 650km from a full tank (60 liters I guess) of diesel. I keep my revs below 2000 rpm all the time. I avoid using the brake unless its really necessary, thus saving a lot of fuel. Servicing the car regularly also helps greatly with fuel economy. Don’t drive hard, drive clever. I think there’s courses available somewhere to help train motorists to drive with better economy. Clearing out the boot with unnecessary heavy junk also helps. Car… Read more »
Given that the total population of Saudi nationals in 18,707,000 and total annual oil revenue is 8.5m X $74 X 365 = $229.6 billions; then even if they shared it equally amongst the population, the moiety of each national: $12,272 would still leave them in poverty street if they had no other source of income. The effect of raising the price to $91 per barrel would give each national $15,100, still less than Ireland pays street sweepers, so we are in no position to complain about the oil price.
The problem that is going to occur is that a new wave of property transactions are going to have a significant effect on our ability to wean ourselves away from fossil fuels. Renewable Energy proposals and schemes are watching the funding which should be heading their way, go back into property (UK and NI not ROI you still have some way to drop). The mass buying of flats by speculators calling the bottom of the market and using very expensive finance is already going at full speed and diverting monies into short term strategies by lenders who seem to have… Read more »
Irish Enigma Who broke up the Ottoman Empire that once ruled the complete Arab World ? Who initiated the State of Israel? Two great Irish men were the chief players .They were T.E. Laurence from Devlin , Co. Westmeath and Capt Joyce from Galway both served in the British Legion .Laurence took his mothers name after she eloped with his father a Lord Carbury and he never knew the true identity of his father until later in life .He was educated in Oxford and studied Archaeology and Arabic Studies . He singlehandedly organised the various disjointed Arabic Tribes to revolt… Read more »
Great article! Roughly in line with jboyds comments above ( I’d argue about his detail a wee bit ) I would say this is where some of the debate should be steered towards now – that is the oppertunity cost of the bailouts and economic crisis. The future looks poor for Ireland in regard to energy consumption – we are among the worst offenders in Europe if not the worst – and we have lots of recently built housing without infrastructure in the wrong places. We are completely car orientated in our lifestyles and therefore hugely exposed to carbon-fuel price… Read more »
David, I think you forgot to mention in context that the house of Saud is not only killing revolutionary uprisings with kindness but brute military force as well as is the case in Bahrain. The Jasmine revolutions and QE policies in the US are correlated: http://static.seekingalpha.com/uploads/2011/4/7/164524-130217654123059-Michael-McDonough_origin.png Note the green bubble in this chart. http://www.sipri.org/research/armaments/milex/resultoutput/trendgraphs/Top10bubble/top10bubble2010/image_view_fullscreen Worth mentioning that the 70bln dollar weapns deal between Saud and the US was the biggest ever in history. To suggest that democracy will be implemented in the middle east as a result of the uprising is wrong. Democracy can not be accepted in these states… Read more »
The Saudi’s may not be in a position to increase output. It is generally accepted that we past the point of no return (i.e. peak oil), Western economies have not sufficiently adapted to this new reality, so you are about to see another issue enter a very cluttered socio-economic equation.
Advice: Buy a bike and grow your own vegetables.
I would be interested in McWilliams elaborating on exactly what he means when he writes: “More liberty over there, means less growth over here – hardly ideal”.
Davids straight line link between their liberty and our growth is based on the old energy supply paradigm. Energy must come from mineral oil and flows from the oil wells of Saudi Arabia to the petrol pumps in Sallins. Ireland need not be as oil dependent as he implies as in fact we are energy rich. Much like those Saudi bedouin of 100 years ago we are blind to the immense energy resources we do have. Maybe in fact the exact opposite to what David McWilliams postulates will actually be the case. The very fact the growth of democracy in… Read more »
Libya used to export 1.5 million barrels per day, ranking it 14th in the line of producers; 1.5 million is regarded as a ‘drop in the bucket’ in terms of global oil production. Some rightly suggest that current unrest is being used as another excuse by speculators to push oil prices higher. The issue of speculation is the elephant in the room not mentioned in the article (why not?) and is something which has been going on for years (remember the highs around the worst moments of the war in Iraq) and yet people who are fighting and dying in… Read more »
nuclear is not an option for Ireland for a number of reasons, firstly it is eye wateringly expensive and the country is flat broke. Secondly it would have be on a smaller scale due to the size of the Island population and this makes it even more expensive (see Prof Fitzgerald report of energy publiched april for govt). Thirdly no one has yet worked out what to do with the waste- the uk is sitting on 100k tonnes of it and nowhere to put it short of blasting it into space- making your electricity actually cost more than you will… Read more »
Wind and waves, that’s the way we should be going; what we’re getting from this government is more wind and piss.
Black GOLD
We have loads of it off the West Coast and had we invested €100bn as we seem to be throwing away to the Bondi Bankers we would be the richest nation on the planet .Think about it ….we would have Sheik Deco and King Abdula McClure……and no sand anywhere .
Made a lot of enquiries some time ago about installing a domestic wind-turbine – it’s about the only form or renewable energy for which there is no grant. Light and solar panels, from which we could get least value at the time of greatest need, the winter, grants galore; wind-turbine, from which we would get greatest value at the time of greatest need, winter, no grant. Plugging into national grid, large obstacles; remuneration for excess produced by domestic turbines, minimal, lowest in Europe by a street. And all this when it was a ‘Green’ Minister at the wheel. The ESB,… Read more »
Three things overlooked;
1. Carbon is not bad, CO2 is a life giving gas, if there were more of it in the atmosphere we’d have more plant growth and less starvation, in theory presumming it was distributed fairly.
2. Wind energy is highly inefficient, there is NO-WAY wind can replace coal/gas/oil, the amount of energy stored in these minerals is staggering, think of all the plants/trees etc. that went into the creation of oil.
3. Germany has said it will stop nuclear energy, this inevitably means increased prices for us all!!!!
David
Are you getting so hard up for money that you have to appear in a advertisment for Bulmers Cider ?
No hope for the rest of us then !
Nem, nem soha!
People under the age of 50 will not get a state pension until they are at least 68, under government changes.
http://www.independent.ie/national-news/anger-in-dail-as-pension-bill-raises-age-to-68-2677473.html
Affordable housing scheme scrapped.
http://www.independent.ie/national-news/affordable-housing-scheme-axed-2676463.html
Yeah, Labour are making a real difference! WTF!
Hello, This forum is in danger of going the way of newscientist or youtube or countless other (mostly American I notice) forums/blogs/etc. where participants take potshots at each other and trade insults. That’s a shame as we have avoided this sort of thing (mostly) here up to now. I suspect some posters are understandably suffering from ‘battle fatigue’ and would be as well advised to take a break for a while rather than becoming embroiled in ridiculous spats. As for me, I have no interest in getting upset with fellow free-speakers and live by the old expression; ‘water off a… Read more »
EIA data show strongly growing global oil production reaching new peaks in excess of those reached in 2005 and 2008, whilst JODI data do not and are more consistent with a continuation of the bumpy plateau reached in 2006. Why is this important? There are a number of issues at stake. First, the EIA data give the impression that high price has fed into an increase in global production capacity whilst the JODI data do not. The EIA data give the impression of strong growth in the global economy feeding into higher demand for and production of oil whilst the… Read more »
David, you ignore the third possibility as to why the Saudis might not be increasing the oil supply, namely that they simply can’t, because they don’t have it. Peak oil (rather than speculation) is the real elephant in the room. One may dispute when it will happen, or to what extent it is or is not a factor in the current high price of oil, but few argue that oil is anything other than a finite resource and therefore subject to Hubert’s curve. If you take the long view, if oil doesn’t peak in this decade, it will peak in… Read more »
Maybe the Saudis like the high price of oil for their domestic issues, but I think the more likely answer to them not increasing production is that they can’t. Remember 2008 when George Bush went on bended knee to the Saudis to get them to increase production because $147 barrels of oil were crippling his economy? The Sauidi’s answer was ‘the world is well supplied’. They blamed the high price on speculation & maybe this was partly true. But then again, flooding the world with an extra 2-5 mbd would have definitely brought the price down-but then the GFC brought… Read more »
Re oil price rise and other commodities, no mention of all the fiat $$ printed into circulation to keep the fat cat afloat
BTW watch this…….
http://www.tfmetalsreport.com/forum/nigel-farage-greece-could-default-weeks-time-faz-baby/467
Where Did All of the QE2 Money Go?
http://www.businessinsider.com/where-did-all-of-the-qe2-money-go-2011-6
Reasons for high petrol prices;
1. Demand and supply; Very little oil is being pumped out of Africa, the adverse weather in America, Chinese refineries go into maintenance season, Japanese demand is down.
2. Technical issues; Crude is hovering between two technical thresholds, WTI won’t drop below 94.50 and the wti/Brent spread is widening ergo we are going to sit between 94.50 and 100.00 a barrel for the foreseeable future unless GS say otherwise.
3. Goldman sachs forecast a rise to 115, guess what crude goes to 115, whatever GS says, the market follows.
An interesting overview of Peak Oil from the US perspective. http://www.marketoracle.co.uk/Article28696.html Key points i) politicians do a lot in the “talk space”. Be sceptical about it – the more inspiring it sounds, the more ridiculous it will end up. ii) the fundamentals concerning oil supply are awful for the future. iii) there is a personnel problem – too few engineers and geologists (to many people going to college to work in the entertainment sector, or the speculation/FIRE economy). [ If any of you are unemployed – you might consider starting a Mechanical engineering course in an regional college, and burshing… Read more »
…and now we have Michael Lowry and his plan to bring “Vegas” to Two Mile Borris. It is like something on a comedy show – except, he is serious.
http://www.businessinsider.com/the-10-metro-ares-with-the-highest-foreclosure-rates-2011-6#10-merced-california-1
Just have a look at city number 1, for being the city that has the worst rate of foreclosures.
that is without asking the question “what has speculation ever done for the Irish economy, or Irish society ? ”
Lowry, you muppet – we need less speculation, not more.
Petrol…driving…hmm Does anyone remember the song ‘Driving Away from Home’ by ‘It’s Immaterial’? Well today is the day….just get in the car….put the pedal to the floor….and keep on driving. Events have overtaken all rhetoric now it seems. I remember being on a site 11 years ago and noting concrete being poured onto to a metal decking floor which had not been propped up….and screaming at two workers below to RUN… They just escaped as it came crashing down. Today I have the same feeling. Good luck with the book festival David, Sian and team. Was in that neck of… Read more »
Never mind that sh*t, here comes Mongo!
http://www.independent.ie/business/european/greenspan-claims-greek-default-lsquoalmost-certain-2678242.html
Are these ‘renewables’ just a rip off here? I recently got a quote from a local plumber to install a solar panel: 1500 for the panel (30 tubes), less 800 grant, 800+ for a new cylinder and 1400 for installation. Total 4k less 800, ie 3,200. I don’t think it’s worth it. I don’t think anything over 2k, everything included, would be worth it. Maybe an extra 500 for novelty value. By the way there’s a co. operating out of Meath who are doing mailshots around the country. ‘Er Indoors invited them round for a ‘free estimate’ for solar panels… Read more »
Looks like Merkel and Sarkozy blinked first in their standoff against the ECB.
Joe Stalin, when told that the Roman Catholic Church had worldwide influence reportedly asked “How many army divisions do they have?”
Likewise with the ECB. When governments are asked “Where would we be without them?” –they cave in meekly.
Four Graphs 1/2
I was playing with the research tools at the Federal Reserve bank St. Louis. Here some interesting results:
1. Corporate Profits (after Tax) from Reagan to date
http://dl.dropbox.com/u/4914840/reagantodate.pd
2. Corporate Proftis 2007 to date
http://dl.dropbox.com/u/4914840/2007todate.pdf
The ‘Titanic’ Republic Not a single banker has appeared in court. Not a single politician has been before a parliamentary enquiry into Ireland’s economic and fiscal crisis. 110,000 families are in danger of having their utilities cut off while ‘Catch me if you can’ Kenny, clearly demonstrating solidarity with continental elites, is pulling a ludicrous €200,000 per annum (plus expenses no doubt). Access to the State pension for those under 50 years of age has been increased to 68 (if you can survive the stress of being a member of the working poor, or as some politicians like to euphemistically… Read more »
It is a coincidence that Max Keiser and David are talking about oil in the same week during the huge full moon. Hopefully John Allen will explain this better and help us put things in universal context Should the price of oil be going down? Of course not – oil is a form of currency and is worth far more than silly paper money. Why do you think there are so many wars going on – there will be even more wars in the future when everyone is fighting over oil or for the fear of a lack of it… Read more »
One way to clear the crowded Irish Presidential race: simply tell the candidates that the new post pays the average industrial wage, that will trim it down overnight. The candidates were asked what one thing they would do for the country, and quite frankly, their answers were uninspiring, ranging for yet another conversation with the people to re-creating the Republic (the Presidency has almost no political powers apart from conveying the Dail in certain circumstances or having legislation reviewed), neither of which was exercised for NAMA or the bailout, the single worst decision in the history of the State. Wage… Read more »
The most important video you’ll ever see http://www.youtube.com/watch?v=F-QA2rkpBSY
On the question of peak oil, I’d like to share some facts. * The rate of discovery of new reserves has been in a steady decline since the mid 1960s (http://www.planetforlife.com/oilcrisis/oilsituation.html) and the rate of consumption overtook the rate of discovery in the 1980s. * Most oil producing countries have already peaked (http://www.theoildrum.com/node/5576). * The global economy is heavily dependent on this single exhaustible commodity. Transportation is almost exclusively dependent on oil and there are many many products that are derived from oil (http://www.ranken-energy.com/Products%20from%20Petroleum.htm) * Some are of the opinion that the current global economic difficulties were sparked by a… Read more »