The subject of oil
News abound of a 300,000 increase in the daily production of crude oil by Saudi Arabia and the decision by Congress to cut supply of 70,000 barrels per day into the US strategic oil reserve certainly made a few people happy but the end result is literally and figuratively a drop in the bucket.
An increase in supply by 370,000 barrels a day will have little to no impact on the current price of oil for a variety of reasons. First and foremost is that many countries enjoy the ability to print money. Even better is that the United States can print US dollars to use immediately for oil, other countries have to exchange their home currency first for dollars then buy crude oil unless going through the few nations that accept other currencies. Second is that China’s growth has created a consumerist China, no doubt that the rising middle class can afford new luxuries including personal cars and other energy intensive products.
The biggest reason is due mostly to the total world production which sits at around 82 million barrels per day. Though new supply is likely to hit the market, it represents less than .5% of the total daily production and will only temporarily drop prices by 1-2%. The market can readily absorb cheaper oil prices which makes some uses profitable yet again.
Oil prices do have a profound impact. Diesel fuel is nearing $4.50 a gallon which increases the price for all goods, as they have to be transported from point a to point b. On the subject of oil, we should be due for a slight correction back to the $110 level where there was much resistance which will now act as support. In the mean time, it appears that speculation is backing up much of the higher prices.
