The oil Arguement

The Oil Argument

By: Kian Mokhtari

The recent meeting in Saudi Arabia failed as an initiative to end the world oil/dollar related dilemma mainly because a traditional view of supply and demand was reviewed in order to find the possible solutions to the oil price hike conundrum.

Speculators were blamed, and so was the weak dollar and OPEC quite correctly said there is no shortage of oil on the world markets to justify greater production.

But that in our opinion is not the way to look at things as things stand all over the globe. The supply and demand equation has gone into reverse somewhat.

Let us try to explain the problem: All the world oil resources are now mapped. Some oil resources lie in areas that cannot be economically tapped; in other words the cost of exploration, location and extraction outweigh the economic gains. So we have recognized almost all the oil reserves around the globe and the volume of the accessible reserves have been accurately estimated. Such precedence for the accuracy of available estimates has never existed to this degree before because new methods of exploration and location have never included dozens of satellites gauging the geographic position and volume of oil reserves before.

To put this in more simple terms, imagine that all the available oil in the world can be placed into a tank of predetermined volume. Also imagine that the rate of consumption per day of oil from the hypothetical tank is predetermined. Since the quantity of oil in the tank is finite the more you extract the more expensive the commodity gets because you are likely to run out of the available resource a lot quicker. So by upping production the prices also go up in direct contrast to the traditional view that more oil availability means cheaper prices.

So the only factor remaining that can lower prices is taking less out of the tank and consuming less so the precious resource lasts longer.

This is where the speculators’ argument becomes absolute!

The second problem is the relationship between the price of gold and oil. We explained this in a previous article (“Chain”, Kayhan international 30-04-2008). The rate by which the price of gold rises corresponds to the rise in the price of oil. However this relationship is relative, in other words the mathematical link between the gold/oil price rises is variable. In the highly unlikely event of the US dollar keeping its present value, should oil go to $200 , gold prices will not be able to keep up because investors in gold will not be able to make a viable profit on gold should they be forced to buy gold at crazy prices. Also, gold is finite like oil, but as an element does not burn into thick smog and hence its price hikes cannot be justified.

With the US dollar in a nose dive due to natural prevailing economic conditions throughout the globe the oil/gold price link can be kept up for a little longer but the two precious commodities will eventually have to divorce and breakaway from their bilateral relationship.

In such a scenario what can possibly determine the price of world’s leading currencies?

One suggestion is that energy reserves can replace gold as backing for the world currencies. Allow us to explain again before we get red flagged by the chief economists.

Levels of energy production can also act as currency reserves. Now this energy maybe nuclear, solar, wind or water generated. But because it is infinitely expandable through advances in science the world economy can expand alongside infinitely, making high credit levels a viable option again.

This solution is the only viable solution for future determination of the value of the world currencies while simultaneously the level of available credit is kept in check without world recessions emanating from over borrowing by overzealous lenders. But this solution may also mean a massive tectonic economic shift in global polarity, because it is the countries first to the post that will be the future’s leading nations.

In our scenario, countries with wasteful unreasonable energy consumption and gas guzzling cars will also possess weaker currencies and will be less creditworthy, but countries that produce much more energy reserves through any method (solar, wind, nuclear etc) than they consume themselves, will not only possess stronger currencies but will be able to draw more credit to fund their future developments.





+ Nader Mokhtari ; ٤:٠٦ ‎ب.ظ ; جمعه ٢۸ تیر ،۱۳۸٧
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