Selling Oil For An Unguaranteed Currency
Rob Mackrill - Wed 21 Nov, 2007
Abdurrahman Salim Atiqi, Kuwait's one-time oil minister sneered back in 99: "What is the point of producing more oil and selling it for an unguaranteed paper currency?" If the Kuwaiti oil minister was sneering then, what would his demeanour be today? What's beyond sneer...disgust? Perhaps not. They are getting almost ten times the dollars for their sticky black goo but the unguaranteed paper currency they get in exchange is worth less. It's lost a quarter of its value against the euro and around two-thirds against the ultimate currency, gold.
‘Drowning in Oil’...
...so announced The Economist cover to its readers in March 1999.
A cover that unwittingly caught the bottom of the market and one they’re yet to live down with every uptick in the oil price.
At that time oil was $10/barrel. The Economist speculated it could go lower. As low as $5/barrel was possible it reasoned, as cash-strapped and politically vulnerable Gulf States boosted production to cover budget shortfalls.
Meanwhile, ‘Big Oil’ was not spending big on looking for more of the stuff. Where was the return when Shell was basing its projections on $14 oil…and BP, a similar forecast?
And weirdly for economists, this cheaper price didn’t trigger higher consumption. A report at the time by Arthur Anderson concluded that though the oil price had halved, demand had hardly budged.
Cruel sport as it is to remind the good journal of cette grande boo boo, some lines are just too good not to mention in passing:
‘It would be progress...to get away from the notion that oil is scarce - an assumption that led to two decades of energy-policy mistakes, such as subsidising coal and nuclear power.’
The one dissenting voice cited was that of a Chevron boss, David O’Reilly. He was labeled a ‘sceptic’ of a long-term low oil price. He referred instead to a “price siege” at that time aggravated by Asian economic troubles stunting demand.
Well what do you know, scroll forward eight-and-a-half short years and it looks like the lone sceptic got it right.
Not only that, his company went on to sponsor a website to promote the energy debate. It even features a game ‘Energyville’ which, as it happens is sponsored by The Economist. Alarmingly a ticker notches up the barrels of oil consumed during your visit to the site and on the home page it reads:
“Every day the demand for energy becomes greater, and every day it becomes harder to find. Where will it come from?”
No easy answers there as oil rises to a whisker of being ten times its ‘99 price. Light sweet light crude (West Texas Intermediate) hit a record $99.
Stock markets may fall, and Western economies struggle, but a progressively higher price has seen quite a change in fortunes for the Gulf States. We now read about their giant coffers of rainy day money - aka Sovereign Wealth Funds (84m barrels a day at $100/barrel sure adds up to the mother of all cashflows). We also read of their expansive and uber-luxurious property schemes rising out of the sand (and frequently out of the water) and their new financial exchanges.
They’re not taking any chances. The world may have forgotten $10 oil, but Middle Eastern rulers haven’t. Whether the price falls or it runs out they’re evidently determined not to be caught with their pyjamas down next time around. Mono-industrial Gulf economies have taken to heart a word out of the investor’s lexicon – diversification.
One comment from The Economist article that still sounds fresh is that of Abdurrahman Salim Atiqi, Kuwait’s one-time oil minister who sneered:
‘“What is the point of producing more oil and selling it for an unguaranteed paper currency?”’
If the Kuwaiti oil minister was sneering then, what would his demeanour be today? What’s beyond sneer...disgust? Perhaps not. They are getting almost ten times the dollars for their sticky black goo but the “unguaranteed paper currency” they get in exchange is worth less. It’s lost a quarter of its value against the euro and around two-thirds against the ultimate currency, gold.
From $10 to $100 in eight and a half years...where to in another eight and a half?
Regards,
Rob Mackrill
The Daily Reckoning UK
This article is from The Daily Reckoning. The Daily Reckoning digs deeper than your newspaper ever dares to bring you the real truth about the stock market...the gold price...oil supply...property trends...interest rates...the US dollar…China's bubble…commodity prices…and much more. And you can sign up FREE!
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This article is from The Daily Reckoning. The Daily Reckoning digs deeper than your newspaper ever dares to bring you the real truth about the stock market...the gold price...oil supply...property trends...interest rates...the US dollar…China's bubble…commodity prices…and much more. And you can sign up FREE!
Interested in discovering the next sector set to blast off? How about learning the specific shares the experts see as the most profitable in 2008? Attend The World Money Show London and hear from 50+ investment experts as they reveal their profitable strategies and provide their specific stock picks. The World Money Show London is being held 30 November - 1 December at The Queen Elizabeth II Conference Centre and will feature 14 panel presentations and leading investment product and service providers. Call today to register for The World Money Show London at 00 800 1414 8888 (international free phone) between 10.30 am -10.30 pm EXCEPT from 28 October to 4 November when hours will be 9.30 am to 9.30 pm because of the daylight saving time difference. Don’t forget to mention priority code #009376. Or visit: http://www.worldmoneyshowlondon.co.uk/main.asp?scode=009376
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