OIL PRICES GOING DOWN FOR GOOD? TOO EARLY TO SAY!

Erle Frayne Argonza y Delago

Good evening from Manila!

We Manilans were met this morning with the seemingly good news that oil price nose dived to $125 per barrel. As this news was released, we have just three (3) days before Her Excellency, President Gloria Macapagal Arroyo or GMA, will deliver her State-of-the-Nation Address or SONA.

With due respect to a fellow economist, the eminent world woman leader GM Arroyo should better not say lies comes Monday SONA that her actions on oil tax in Manila are responsible for bringing down global oil. Rather, her regime’s actions on state imports of rice immensely led to more speculation on the global commodities markets that indeed contributed in no small measure to raising the price of rice world-wide, actions that added pressures on oil prices to go up too.

Fellow Earthans, please look at the backyard of the Kingdom of Saudi Arabia, where the honorable King pledged before the UN Secretary General last month that the oil wells will pump out more stocks of the commodity so as to shore up the supplies by the month of July. It is now the tail end of July, and so it seems that the Midas touch of the KSA King has been creating sure-fire effects on gas prices.

The question worth asking is, will the latest decline in the price of oil be for good? Remember that the soaring prices of oil were largely caused by massive speculations in the spot markets, conducted by diverse financier groups. To a certain extent, the inflationary patterns in the grains prices also contributed to inflationary patterns in the oil sector.

There was the demand side that was cited as possible cause of the oil price decrease. The observed decline in the usage of oil by American consumers had accordingly factored into the equation, thus reducing oil price in global spot markets.

A simple multivariate analysis would show us that a combination of (a) supply side actions (KSA King’s ‘pump more oil’ policy) and (b) demand side behavior (Americans consume less oil) have (c) dampened speculative pressures and eased oil prices a bit. In other words, the predatory financiers were caught flat-footed by the double-whammy, even as some losing speculators are now hurting badly over the latest developments.

But do mark this: the financiers will strike back. The cyclone season is around, one can muse safely that cyclone devastations will induce short-term shocks on food, oil, and some non-durable commodities. Such eventualities could then induce pressures on cyclone-related or force majeure-coverage insurance, possibly impelling prices of the said commodities to go up from this month till November.

There also is the US federal campaign period coming, which will see inflationary spending from both parties as well as from the federal government as part of pump-priming measures. Such eventualities will altogether lead to new rounds of oil consumption in America, which will continue till the winter months.

No, definitely not, we are not at the tail end yet of oil hyper-inflation. This is the least that I can forecast for the moment.

[Writ 25 July 2008, Quezon City, MetroManila]