Oil at US$70 and rising

In my January 5, 2009 column, I talked about the extremes of 2008. That it had everything. It saw the rise of oil prices to US$147.00 per barrel in July and witnessed its plummeting to US$37 per barrel towards the end of the year.          

As clearly mentioned in the same column, its price decline was never difficult to comprehend. It was primarily due to a sizeable drop in the demand for oil in the USA. Undeniably, the world’s biggest consumer is the USA. They consume more than 20 million barrels a day or more than ¼ of the world’s output. Therefore, demand for oil is largely influenced by USA’s industrial and personal consumers’ behavior. 

As we’ve witnessed in the past months, USA’s dire economic crunch spilled beyond its own territories. Its recession is taking its toll unsparingly. Due to its sheer size, its debilitating economic turmoil traversed all over the globe. Manufacturing and financial companies were closing down. Foreclosures of mortgages remained unabated. Consequently, economic activities like manufacturing had largely slowed down. As these manufacturing outfits used to consume sizable quantities of oil, its demand therefore had substantially dropped. Thus, oil prices took a nosedive.

Then, I emphasized that while cheaper prices maybe a happy development, its darker side was more catastrophic. As it turned out, the decline in prices generally created a vicious spiral of negatives such as falling in profits for businesses, to closing of more factories which surely led to unemployment, diminishing of incomes, and increasing defaults on loans by companies and individuals.  Also, I pointed in the same column, that as recession persists, as an exporting country to the USA, we shall also suffer. We shall find no market at all for our products. If there is, prices will be unprofitably low. 

Finding no market for our exportable products, our manufacturers consequently cut production targets. Consequently, in fact, some companies closed their factories and fired employees. Then, I wrote, that with a growing list of unemployed and, therefore, penniless Filipinos, demand for local products will surely decline. Thus, even companies that were just supplying the local market suffered as well.

However, as early as January 5, 2009, I also pointed in my column that this year will be entirely different with an immensely popular president taking over the reins of the world’s largest economy. Then, I boldly predicted that in the first two quarters of the year, we’ll certainly see the plugs that will stop the bleeding in place. By the third quarter, President Obama will have a stronger grip of the economy. By the fourth quarter, the US economy will start to rebound and the world will again start enjoying the benefits of the initiatives of President Obama and the democrats.

Then, I went ahead by emphasizing that with the US economy back in shape, their domestic demand for essential and non-essential products will certainly prop up. Therefore, the long endured sufferings of our Cebuano exporters will hopefully cease. Also, outsourcing activities will certainly prop up.   Known as the top destination for BPOs, Cebu will certainly take a sizeable slice of the outsourcing pie. In both instances, Cebu’s employment rate will certainly increase. Once it happens, real estate developers will find their houses built too few for the rise in demands. Also, manufacturers of products for domestic consumption and retailers will find some solace, not just from the beneficiaries’ demands out of the OFWs’ remittances but from the locally employed benefactors as well. 

Then, in my April 13, 2009 column, I reemphasized that when the US economy starts rebounding in the fourth quarter of this year, the demand for oil will certainly increase. Logically, oil prices will again shoot up. However, forcefully, I declared that while looking at the fourth quarter, we should not be complacent on the second and third quarters. Then, I presented the facts why oil prices shall hover between US$55.00 and US$75.00 per barrel before reaching the fourth quarter. These were the reasons why (as mentioned on that date).

First, oil producing countries have different preferential prices. As much as possible, they would like to impose their prices, in whatever means possible, to sustain their economies.    Deutche Bank, for one, calculated late last year how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries who are often the first to call for production cuts, need the highest price per barrel of US$95.

But taking all these measures together, the bank says US$60 a barrel seems like a probable place for oil prices to level off. 

Secondly, we should factor in the oil drilling activities in the USA and the companies’ expected returns on investments and operating costs. 

The oil price collapse was simply unbearable and sent some producers packing. For these oil producers to sustain their operations, oil price should not go down below US$75 a barrel. They find no sense to maintain their wells with oil prices below this level. Consequently, the number of oil rigs in the USA fell almost 50% since October of last year. 

Today, it is breaching the US$70.00 mark. Definitely, it shall further increase. Worst for us Filipinos, as the US economy improves and as the dollar flexes its muscle, our currency shall soon depreciate against it and, consequently, oil becomes more expensive. 

Have we prepared?

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