James Pethokoukis over at Capital Commerce gives us six reasons why the super-spike may soon be relegated to the history books.
1) Russia is scrambling to cut taxes on its oil industry to boost investment in new fields and to reverse a looming decline in production.
This would be a good start, but until Putin, excuse me, Medvedev, decides to reverse his quasi-fascist economic policies and open up Russian reserves to foreign development, don’t expect much of an uptick in production.
2) Brazil continues to find more oil offshore in the Santos Basin, a collection of potential oil fields that could be one contiguous megadeposit of crude oil.
Again, very promising, but many question marks remain. If Petrobas (Brazil’s state-controlled oil company) is being completely forthright and the government estimate of 33 billion barrels isn’t just a big fish story, then this really would be a big deal. Then again, how soon is any of that oil going to available?
3) In the US, Congress may start considering ending longstanding bans on domestic drilling.
$135 oil certainly makes domestic drilling more politically palatable, but with Barack Obama likely to capture the White House this November, and with the Democrats set to secure significant congressional majorities in both houses, we wouldn’t hold our breath on this one.
4) Asian countries are starting to reduce their domestic fuel subsidies, which could dampen demand.
Again, we wouldn’t hold our breath on this one. Asian governments saw what happened in Haiti and Argentina when food prices got out of control and they aren’t going to invite political instability when their reserves of foreign currency and trade surpluses allow them to continue to comfortably finance subsidies. They may reduce subsidies marginally, but not enough to significantly effect price levels.
5) Americans are driving less. The Transportation Department reported Friday that in March, Americans drove 11 billion fewer miles than in March 2007, a decline of 4.3%.
This fact is far more substantive. As the American economy continues to sputter and consumers respond to soaring prices, demand is likely to shrink. This decreased demand could indeed have an appreciable effect on price, but it’s quite clear that the US’s effect on global oil prices has diminished.
6) American Airlines said it would reduce flights in the face of soaring fuel costs. Air France warned of a profound restructuring of the world airline industry.
This argument is also quite reasonable. Credit Suisse, for example, sees airlines cutting capacity by as much as 10% by Q4, and as much as 15-20% by 2009.
Mr. Pethokoukis’ arguments are mostly anecdotal, and even if they were substantive, it’s unclear if they would be enough to negate surging demand in emerging markets. Nevertheless, he may be on to something. As the US economy continues to sputter and demand begins to contract, expect at least some speculative froth to come out of commodity prices.