Political matters lack same punch in crude prices

Journal Record, The (Oklahoma City), Jul 10, 2008 by Jerry Shottenkirk

There was a time when news such as Iran's missile testing would've caused a serious reaction in the world oil markets.

On Wednesday, it was a penny's worth.

International crude oil prices have long had a knee-jerk reaction to just about everything.

But the reaction to Iran's missile testing on the Strait of Hormuz isn't what it once would've been. Crude lost a total of $9.25 per barrel Monday and Tuesday, and despite going up a dollar or two early in the day, oil returned to the trek it's taken this week.

Oil for August delivery was $136.05, barely ahead of where it settled on Tuesday.

Robert Dauffenbach, associate dean for research and graduate programs at the University of Oklahoma's Price College of Business, said there is new proof that events don't have the effect they once had on oil prices.

"I don't think present prices are that justified," Dauffenbach said. "They have kind of a speculative smell about them, given that the world economy is slowing."

Many have shied away from predictions.

"I have learned not to second-guess the markets," said Chuck Mai, AAA public affairs director who keeps a constant eye on crude prices as well as those at the pump. "In the past, I would look for certain reactions from the market, given specific stimuli, but anymore, those rulebooks have been thrown out the window and new ones are written each day."

Mai said that unless war breaks out with the U.S. or Israel bombing Iran, the market will continue to be difficult to judge.

"Unless there's a marked escalation of tensions, or if the Straits of Hormuz are shut down to oil traffic, it's anybody's guess what is going to influence the market," Mai said. "It's beyond comprehension and prediction. And those who are predicting what will happen are guessing."

The Straits (or Strait) of Hormuz connect the Persian Gulf and Arabian Sea. The U.S. Department of Energy's Energy Information Administration says it's the world's most important chokepoint with an oil flow of 16.5 million to 17 million barrels of oil per day.

While the transport of oil would be possible, it would be highly costly to the world if the area is closed. Alternate routes would be the East-West Pipeline and the Abqaiq-Yanbu Natural Gas Liquids Pipeline, both across Saudi Arabia, or smaller pipelines through Iraq and Turkey.

The world economy relies strongly on the U.S. economy, Dauffenbach said.

"Oil is very difficult to forecast, but we do know the world economy has grown very rapidly and its growth is based very sizably on U.S. demand," Dauffenbach said. "The U.S. demand is shrinking. As a consequence, the world economy has an adjustment to go through."

Emerging giants such as China, India and the area of southeast Asia have developed economically, thanks to the U.S. economy.

"We've had a vibrant consumer market in the U.S. that has been to the benefit of emerging countries worldwide," Dauffenbach said. "Labor arbitrage has gone on and by that we mean firms have switched the location of production to emerging countries. This has given rise to increased demand for energy in those parts of the world."

Dauffenbach said the U.S. is headed toward a "period of adjustment."

"The U.S. economy, while it remains very strong and large on the world scene, is definitely going through a slow growth period that may or may not lead to recession, which is defined as negative growth," he said. "The question is how much can we hope to contribute to that global demand picture, and the answer is not very much. With the world economy so attuned to supplying the U.S. consumer, others are going to go through an adjustment, too."

He said the adjustments will likely lead to some stabilization in the demand for energy.

Dauffenbach said the lack of an abrupt change in crude on Wednesday was a surprise.

"That didn't have much effect on the market, and that's not what I would've predicted," he said. "That's a bad news thing that didn't have much of an impact on price."

Natural gas closed at $12.006 Wednesday, down 36.2 cents. It, too, is probably too high, Dauffenbach said.

"There is talk about oil not being justified at this price," he said. "Natural gas prices are high, too, but not anywhere near the ratios that prices would seem to dictate by BTU-per-dollar spent. Either natural gas prices are wrong, or oil prices are wrong, by historical ratios. The answer might be somewhere in between."

In the meantime, gasoline prices continue to tie or set records, according to AAA.

The national average of $4.108 per gallon tied the record set Tuesday, and Oklahoma's average of $3.928 broke the state mark. Tulsa is at $3.914, which set a record, and Oklahoma City is at $3.885, which tied the city mark.