There is a difference between an event and a trend. An event is an occurrence, especially one that is particularly significant, interesting, exciting or unusual. A trend, on the other hand, is a general tendency, movement or direction. So, now that I have provided a definition of the difference, you might ask what does this have to do with the price tea in China or the price of gas at the pumps.
Unless you live on a deserted island or ride a bicycle, the price of gas at the pumps has risen by about 20% over the past two months. When the price of a commodity goes up, it usually has something to do with a reduction in the supply or an increase in demand. I can tell you that there has been no substantial disruption in either the supply of crude oil or the production. What there has been is a potential disruption in supply if current events in the Middle East result in the destruction or shut down of the Libyan oil production infrastructure. In other words, if Muamar Gadaffi determines he will be ousted as the president and blows up everything, Libyan oil production would be shut down for an extended period of time. Remember, both sides in this dispute have stated that they will not blow up oil production facilities. Fear of this event has led to speculation of its certainty and speculators have pushed the price up to take advantage of the fear component.
I have no way of knowing if this is going to happen but I can tell you how much effect it would have if it did. Libya is the 18th largest oil producer in the world. It represents about 2% of world production. Most of this production goes to Europe. If all of the production was blown up, the other producers would have to increase production by about 2%. This is not a significant increase.
I have heard commentators in the media speculate that the price at the pumps could reach $1.30 a liter by the summer. It might if there is a major disruption in other Middle East producers such as Saudi Arabia but there appears to be little indication that this is likely.
The last time oil spiked up to $140 per barrel was in the summer of 2008, reaching $147 on July 11th. I can remember hearing these same clairvoyants prognosticate that the price would continue to rise to over $200 per barrel. I thought they were nuts and I was correct. The price actually fell drastically to a low of $30.28 per barrel on December 23rd, 2008 . During this same period the price at the pumps went up to about $1.40 per liter and then fell to a low of 73 cents. The price declined so rapidly because demand fell due to consumers deciding to drive less and the great recession resulted in substantially less economic activity.
It would not surprise me to see a trend similar to the one in the aforementioned period. Oil prices could continue to go up if the Libyan crisis is not resolved. This event will eventually be settled. Oil production will likely continue regardless of who is running that country. They need the revenue. Economic conditions will settle down and oil prices will come back to earth. It is quite likely that the world will return to the trading range of between $60 and $80 per barrel. The price at the pump will revert to about what it was before this event. Then the clairvoyants will move on to their next “crisis” that will have “permanent” impact. I will examine that situation with same degree of skepticism that I view their current comments regarding this one.
