Thursday, May 01, 2008

Message from the Middle East

A friend of a friend is an American lawyer in the Middle East, working for a well known international corporation which is headquartered in Asia. He sent our friend an email message the other day, the important parts of which we have permission to pass along (spelling and capitalization in the original):
i think the high oil prices are linked more to the weak dollar than to strong demand at the moment. if the credit crisis / economic situation in the u.s. gets worse and further weakens the dollar then oil prices will rise even more. basically, a 1% shift in the value of the dollar yields a $4 opposite move in the cost of a barrel of oil.

if tensions with iran get worse, this will push up the price even more but a lot of that is already factored in - not all out war, of course.

i think everyone is waiting for w & co to move out of the white house and hopefully a new day will begin. (GO OBAMA!) everybody i talk to is desperate for america to be respected again. nobody wants to see china as the world's major superpower, well except the chinese, i suppose.

in the longer term, the vast oil finds in brazilian waters are expected to radically shift the balance of power in the energy arena. by 2020, they should be exporting enough oil to the u.s. to completely eliminate any reliance on the middle east region, which is expected then to have china and india as its main customers. also, high prices and technological advances may make the vast shale reserves of canada a viable energy source. once there is a technological breakthrough in that field, everything changes. canadian oil reserves in shale are equal to or exceed saudi reserves, i believe, although not of the same quality.


Joe said...

I also thought the falling dollar would affect our cost of oil, but the statistics don't seem to bear that out. Take a look at this graph of average gas prices over the last year or so:

Of course the most notable thing is that we consistently pay about half as much as any other western country for oil. But it doesn't really look like the value of the dollar versus the Euro has really affected gas prices.... yet.

idiot said...

the approximation formula in the email was that for every 1% decline in value of dollar, the price of a barrel of oil rises about $4.00. April of 2007 the Euro was worth $1.3667 and in April of 2008 was worth $1.5817. That is a decline in the value of the dollar against the Euro of 15%. Oil was $70 a barrel in April of 2007 and is $120 a barrel April 2008 or $50 more than a year ago. Under the formula, a barrel of oil would have risen about $60 so the formula related to dollar and barrel of oil is about right, given daily variances in the exchange prices and price of oil prices during the two Aprils.

The graph you note is for gas prices, not oil - but if you look at gas prices - the average price of a gallon nationwide in April 2007 was $2.87, and the average price April 2008 is $3.85.