By Mishal Kanoo
A drop in oil price has more to do with US political hot air than weather patterns.
There are many who claim that the sliding price in the oil market is due to the hotter than usual weather in the US this winter. These people also argue that the US oil reserves are higher than they thought they would be at this time and that the price of oil has therefore dropped. This is rubbish. This is all talk with really nothing significant to substantiate their claims. I said it in the past and I will say it again. The reason the price of oil has dropped so dramatically has been because of politics and nothing more than that.
Before I explain why I think politics is the main reason for this sharp decline, let me state a few facts that have not changed since the summer of last year when the price of oil hit its highest price of US$78. China and India’s consumption of oil has not dropped in the slightest over that time period. These are the two most populous nations in the world and both are emerging economies with a massive appetite for power.
Despite both countries’ leaders understanding that the risk of overheating each economy is great both have grown, over 7% for India and 10% for China. And there are no reasons in either country to suggest a slowdown, while the US’s consumption for oil hasn’t shrunk either.
Put together, these three economic giants, as well as Europe, have not seen a slowdown in air transport, property and infrastructure construction, and their respective power sectors needs for oil in the last six months. Yet we are expected to believe even though these energy hungry monsters are on a binge, oil prices have dropped 35% because the US has had a mild winter?
So those so-called experts are stating that because the US has had a mild winter, and US oil reserves are higher than expected, that the price of oil fell over 35% in six months? Taking this fact on an annual basis means a 70% drop for oil prices if the trend continues.
By any measure, that is a disaster not only for us as oil producers but for all the oil explorers and service companies and they are the main backers of the Republican party in the US. More importantly, even though OPEC has cut, or at least said it would cut, production twice, the price of oil has not moved upwards as it should have. Now Saudi Arabia is saying that it will not cut production and will, in fact, increase production by 40% over its current production rate by 2009.
The UAE is also going that way. Between these two OPEC giants, the market will be flooded by OPEC oil let alone non-OPEC oil that is already overflowing in the oil market.
Even more curious and worth pondering over is the fact that the major loss in price, about US$12, has only happened since the beginning of the year. That is a 20% drop in less than a month.
Annualise this loss, which should only be understood as a way of showing deterioration and not an empirical fact, and it would be over 240% in one year.
Now why I believe the reasons for this oil price crash are political and not economical. As I mentioned in an article published last October in Arabian Business, if the Democrats take over the US Congress, they would make life for the Bush Administration miserable. And that is exactly what has happened for the current government.
If you chart the immediate slide of the price of oil from the US$61 to US$62 level to the present day, you will see that no significant economic developments.
The only significant thing took place on January 3rd when the Democrats took office and the slide began.
Since then, the only significant economic factors that appeared across the news agencies were that the US’s oil reserves were higher than expected. Even this is not really significant because if you tracked this historically, the price shift from this type of news has never been significant. The other bit of news was the weather and heating oil plays a minor role in the overall prices.
What no one talked about was that air travel increased enough to be an equalising factor to that of heating oil. Therefore what else could have caused this slide?
Sometimes the answer is too simple and so obvious that most pundits don’t want to state it because it would make them look stupid for using the same tired, and obviously inadequate answer to the problem.
That would make their jobs obsolete and thus no one would ask their opinions.
I was taught a long time ago that oil and water don’t mix. Let me restate that. Oil and Democrats don’t mix.
Mishal Kanoo is deputy chairman of the Kanoo GroupFor all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
I fail to see how US politics affects oil prices in the way that you suggest. I'm no expert, but my reasoning is that two things affect price: actual supply versus demand, or anticipated supply versus demand. Oil price spikes are caused either by oil producers restricting the supply, or by investors getting nervous that supplies might in the future run short because of war, freezing winters, regional instability, etc. How does the success of Democrats in US elections affects this mix?