Sunday, April 12, 2009

OPEC wants cheap oil.... Hmmmm?

Saw the analysis at MSNBC online from a month ago.  Not exactly timely but something jumped out at me that will alter my perception of what the future might hold.

OPEC tried on Sunday to nudge oil prices up by urging its members to stop overproducing, but the cartel decided not to cut current output levels which could have driven prices sharply higher.  Explaining the decision, OPEC Secretary-General Abdalla el-Badri spoke of his organization's concern over "ugly" global economic times that overrode the desire to achieve a quick fix by setting a lower overall output for the 12-nation producer's club.

First off, I'm thoroughly entertained that a roughly $50 a barrel and $2+ gasoline is considered "Cheap" by today's standards.  Two years ago it was not.  

I know.  Everyone got used to a $200 barrel of crude being a realistic price.  Regardless, I remember making biodiesel and ethanol pitches back when diesel was expensive at $0.75/a gallon and being told that no one would ever buy a biofuel unless it was cheaper.  And oil would never trade wholesale above $1 a gallon.  

I remember one time on-road diesel with taxes hit $1.28 and customers called to complain wanting to know "HOW" it was possible that prices could swing so high (it was caused by a sudden shutting down of the Olympic Pipeline into Portland by regulators because of safety issues).

My how we've changed our definitions and expectations.  Me included (I get really nostalgic at times for a high price of oil being $15 a barrel back when I started at StarOilco).  

Oh how life was easier in the oil business when I was empowered with an Economics degree and so much certainty.  But enough of the simple past - the future has much more potential and a greater opportunity with those with open minds and strong backs.  

Also add to this that OPEC likely has not forgotten that this is not "cheap" but a dream-boat of oil pricing and acceptability.  If the harshest international recession of the last 80 years leaves the bottom of the market at $50 barrel of crude they will be very happy with this new economic picture for oil.  

This is the real point of my post.  Calibrate your instruments.  $50 is the new floor for the foreseeable future.  If the price of a barrel of oil starts trading below this number there is a change in the economic numbers that set prices.  

If I was a practicing economist I would try to set up an experiment to determine volumes of ethanol, biodiesel, renewable diesel, syn diesel, and other fuel volumes as they effect over all pricing of petroleum.  It would be fun to try and create an easy factor of volumes of substitutes (even if they trade at a surplus cost) and their effect on petroleum prices.  

Given the US's energy position in the world not only as a consumer but market that sets prices you would likely be able to just use EPA and DOE numbers to run such an experiment.  I would treat the measurements much like the Federal Reserve tracks the money supply.  With an E1 for only petroleum refined products sold, E2 including immediate blendable substitutes including mandated blends, and an E3 and E4 for moving to wider industrial substitutes such as hog fuel, and experimental fuels manufactured outside of the main streams of commerce.

There has been very little talk about this (other than by the ethanol industry).  To me this is the future of the debate.  If only I could simultaneously work and be an academic.  Ahh, the dream.  Being able to actual focus on the bigger picture without the requirement of betting correctly with your own money.

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