05 August, 2004

Spare capacity?

Some of you may have casually noted that the price of oil is once again setting new records. Brent crude is at $41.22 a barrel, an all-time high. Most of this is the result of the woes of Russian oil giant Yukos, which is in the throes of bankruptcy and numerous court cases. That sordid tale is a saga of its own; the short version is that Yukos owns the Russian government a lot of money and probably can't pay it, and so key assets (like a major subsidiary) are being forcibly sold off to pay the bills. Yukos produces 1.7 Mbd, 1/5 of Russia's production.

The fate of the known universe hangs in the balance, and predictions are being made both ways: some are already moaning that the price will NEVER come down again, that high price is simply a fact of life now. The Saudis insisted that they have 1.5 Mbd spare capacity available NOW, and it will relieve the pressure before the end of the summer. Meanwhile, high US gasoline stocks (despite the tight supply and the peak driving season) suggest that gas conservation may already be coming into effect thanks to high prices.

I have to believe the Saudis are wrong - even if they have spare capacity, the galloping rate at which consumption is increasing suggests that very soon they won't be able to save the day. The question is, where will economic contraction set in first? In the fuel-driven United States, or in the newly energy-hungry Asian countries cum China? Our economy is already sputtering and barely plugging along. One good blow to the solar plexus would kill it dead...

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