1-15-09 by dugan
There are tanker ships loaded with cheap crude oil just floating around the oceans waiting for the price to go up, says a report today by Clifford Krauss of the New York Times. There’s more oil filling every available storage tank on land.
The story of hoarded oil is fascinating, but the report also discusses the collapse of new drilling projects because of the sheer unpredictability of oil prices. And that leads to other bad economic consequences. From the story:
"Schlumberger and Halliburton, the two top oil service companies, are cutting jobs. Many oil companies are delaying investments in more expensive projects, like mining Canadian oil sands. A couple of refiners face bankruptcy.
"The volatility is showing up at the retail level. Drivers who only a few weeks ago were finding relief from the summer’s $4-a-gallon gasoline are now shaking their heads as the average national price for unleaded regular gasoline has surged to $1.79, from $1.62, since Dec. 30.
"Oil volatility has complicated the efforts of automobile companies to figure out future strategies. Toyota had to suspend production at one plant that builds the Tundra pickup truck for several months when gasoline prices soared last summer. Toyota then delayed completion of a second plant meant to build the Prius hybrid when falling gasoline prices led to weakening demand for that fuel-efficient model.
"The gyrations in prices affect shipping and other businesses around the world. Cathay Pacific, one of many airlines that use fuel hedging strategies, recently acknowledged that it had hedging losses of hundreds of millions of dollars as a result of the collapse in fuel prices.
"The slowdown in oil investment is so rapid that some analysts say they believe it is a matter of time before shortages appear that will push oil prices to new heights and damage the economy."
So crude oil markets, which kept shooting skyward last summer even as demand was falling, are still so volatile that another round of economically devastating roller-coaster price spikes is inevitable? Maybe not, if Congress and the White House get the speculative trading that brought us $145 a barrel crude oil and near $30-a-barrel crude oil in a span of 6 months under much stronger regulatory control.
Personally, I’d like to make everyone who invests in a commodity hedge fund take delivery of the shares of oil they’ve "bought."
As in "Honey, the oil guy is here, can you make room in the garage?"
Yeah, I know that doesn’t comport with modern financial markets. But it’s hard to imagine a more damaging outcome than what modern trading tools and pure free markets have brought us.