Oil has hit a point where many analysts believe that it could move below $90 and stay there. If this were to happen, the boon to the economy should be considerable. Lower oil prices would go a long way toward saving the auto and airline industries. It would also undermine one of the key elements of inflation.
This dreamy view of crude’s future however is unlikely to materialize The price of oil will rise again, and the events that will produce this reversal are ready to unfold. The market has just not yet focused on the impending disasters that are likely to occur before the end of the year.
Nigeria is the largest oil producer in Africa. The rebels there have spent their time randomly and stupidly attacking civilian targets. Someone holding a Ph.D in economics has moved into their midst and told them the country’s oil infrastructure is the key to its financial health.
The Movement for the Emancipation of the Niger Delta has begun to bomb pipelines around the nation’s large oil fields. Because the transportation system runs over thousand of miles protecting it is logistically impossible. It seems likely that in a short time a systematic series of attacks will cut a portion of the Nigeria’s capacity.
Venezuela looks just as volatile. Hugo Chavez, the president for life, gives all the appearances of dementia. He has booted the US ambassador and nationalized much of the nation’s oil and production operations. It is not clear that he has the engineering expertise within his borders to keep the system pumping crude efficiently.
Chavez has a new habit of spending time with the Russians, another oil exporter that has hard feelings toward the US and EU. According to The Wall Street Journal, Vladimir Putin dispatched a few bombers to Venezuela for a visit."It was the first time since the Cold War that military jets sent from Moscow touched down in the Western Hemisphere."
Venezuela may cut its own throat by reducing production to punish the US, but its government is not long on logic or foresight.
US oil refineries have dodged two hurricanes that made their way into the Gulf of Mexico. The storm season has two months to go. Luck is luck and never stays in one place for too long.
Crude is going higher and going higher soon.
Douglas A. McIntyre
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