Last comment, if the US dollar was stronger oil would cost less in $US – yes, but in that case it would have little impact on how much you or I in NZ or people in Europe would pay at the pump; while oil would cost less $US, we could buy proportionally less $US with our $Kiwi, Yen, or Euro’s.

In fact a weaker US dollar if anything inhibits Americans ability to buy oil relative to the rest of us, therefore in theory suppressing US oil consumption (oil demand is very inelastic, so not by much) and by reducing their demand – if anything- reducing the cost of oil for other nations.

“nobody needs NZD”; obviously you don’t mean that literally otherwise the $NZ would have no value.

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>>If the US prints lots of money the value of the $US declines relative to >>the currencies of other countries, so what? If we print lots of $NZ our >>currency will likewise decline, Zimbabwe does print money with the >>observed consequences.

The US has printed lots of money in the last year so the value of the US dollar has declined.

If the Saudi’s buy goods from europe with usd and the euro gets stronger against the usd the Saudi’s require more USD to buy the same number of BMW’s. How can they get more USD by selling oil at a higher price.

So some of the price of oil is coming from the Saudi’s trying to handle the exporting of the US inflation.

There is a major difference between the NZD and the USD. You must buy USD dollars to purchase the oil at a price that can be raised to soak up the excess USD dollars being created.

So the US can print money contrast that with the NZ example where nobody needs NZD thats the major difference there is no demand for NZD.

Its simply supply and demand economics of the USD.

So when you talk about the oil price you need to include the supply and demand of the oil and the supply and demand of the usd. Changes in either of these will result in price changes in oil.

Since a fiat currency isn’t backed by anything the supply is in theory infinite.

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Fiat money:
http://en.wikipedia.org/wiki/Fiat_money

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They are left with the same number of $US as the oils purchaser bought in the markets, if they want to invest those $ in the US that’s their business, they can just as easily invest the money in Japan or Saudi Arabia.

If the US prints lots of money the value of the $US declines relative to the currencies of other countries, so what? If we print lots of $NZ our currency will likewise decline, Zimbabwe does print money with the observed consequences.

All currencies these days are termed “fiat” this term simply means that the issuing government no longer guarentees the currency is backed with stored gold, rather the backing is in the form of confidence in the issuing state.

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The cycle isn’t neutral the Saudi’s are left with large amounts of USD which they cycle back into the US by buying US assets like US T Bonds.

If the cycle was neutral then the US wouldn’t be able to print so much money and export their inflation to the rest of the world.

Calling a monetary system neutral is weird especially fiat money since it can be created and destroyed at will. I would never use the word neutral in fact if it was neutral then their wouldn’t be any inflation or more to the point inflation would be 0%. But inflation isn’t 0% is it so the money supply is obviously not in a neutral state it is either in an increasing state (inflation) or a decreasing state (deflation).

What you are ignoring in your simple system is that the supply of the USD is increasing all the time and this creates an inflation effect on the price of oil.

Money is a medium of exchange and it should hold its value and act neutral like what you are saying, except the USD isn’t money, its fiat paper and i think you might be confusing the two.

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Turnip, in oil trading the US dollar acts simply as a medium of exchange, we buy US dollars on the markets, hand those dollars to the Saudi’s the Saudi’s then hand those dollars back to the markets and buy whatever currencies they need. The cycle is neutral, our $US purchases are equaled by their $US sales.

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Inflation adjusted against what and compared to what, if you are talking about the USD where are you getting your inflation numbers from since the US hasn’t published true inflation figures in years.

Well if Oil was traded in Yen then you have no idea what the price of it in US dollars would be. The strength of the USD is very dependent on the fact its the world reserve oil currency. What this means is that if your scenario was true the spot price for USD against all the worlds ccy’s would be a LOT different. One of the biggest fears for the US would be if the oil producing countries decided to sell oil in something other than USD.

I think you may be confused about oil, its not just priced in USD its purchased in USD. This means that when NZ buys oil from the Saudi’s we don’t hand over NZD we hand over USD. Where do we get those USD well we sell goods to the US and they give us USD, where does the US get the USD’s from to buy our goods, well thats easy they print it.

Now if New Zealand tried that little trick of printing NZD to buy other countries goods we would get laughed at by the rest of world and our ccy would quickly become worthless since no one needs the NZD, however because we buy oil in USD we need USD this then keeps the USD higher than it really should be.

But in conclusion you can’t make the statement if oil was traded in Yen then we would still be paying $140US because you have no way to know what the spot rates to the USD would be for all the world currency’s and their is absolutely no way for you to know unless you lived in a world where that was actually the case, Your alternate realitiy probably would have resulted if the Japanese had won the second world war.

You have to understand there is a reason oil is traded in USD, we didn’t pick the ccy by chance well actually NZ didn’t pick the CCY at all, we had no say in the ccy, the Saudi’s picked it in exchange the US promised to defend the Saudi king and keep him in power, don’t you find it strange that the US this great supporter of democracy supports one of the worlds most despotic countries in Saudi Arabia.

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Turnip, Real terms simply means inflation adjusted.

Lets say oil was traded in Yen rather than $US, what would the price in US dollars be? Well because Yen and dollars (and most other currencies) are traded freely, you’d still be paying about $140US to buy the yen to buy a bbl of oil.

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I think in the short term oil will come down as it makes no sense to cool off the western economy to much, and the Saudis know this. I rekon we will have up to 2 years of more bearable fuel prices and then the price will hit $300 + a barrel as supply becomes the main issue. You can’t export western culture to developing countries and still have all the pie for your self, these guys all want a car and every thing that goes with it, there is simply not enough to go round.If we take the current situation as a wake up call there is enough time to minimise our energy use and maybe prepare our economy a bit, but alass, as soon as the price drops again most people will probably stick their heads back in the sand.

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Sorry I had that round the wrong way i mean’t to say demand is rising faster than supply.

And yes the Americans are being hit harder along with all the Gulf states who have their dollars pegged to the US.

As too your other point i don’t understand “price in real terms”. What are you calling real terms?? The only price for oil is in USD, not NZD or CAD or AUD. Iran will sell you oil in EUR’s, but who knows for how long that will last.

Now if your country’s ccy isn’t USD then the exchange rate between your country and the USD is VERY important in determining the price of oil at the pump. If the NZD/USD exchange rate went down to 0.37 then the price of oil would rise a lot, yet the real price of oil could go from 140 to 142.

Add to the fact that many countries around the world including New Zealand are not letting their currency’s rise against the USD and you end up with huge rises in all currencies.

To conclude the rise in oil price is not tied to just supply and demand all though that is a factor you can’t ignore what is going on in the US economy and the effects its having on the world oil price. One of the reasons we like having oil priced in USD is because the US used to be one of the most stable economy’s. That stability appears to be changing, here in the US we have talk of deflation, inflation and even hyper-inflation, All of those conditions if they happen will impact the price of oil that people in NZ pay at the pump. The only way NZ could remove its self from that loop it to produce and sell its own oil.

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No turnip, supply is not increasing faster than demand. Whatever the strength of whatever currency oil in primarily traded in is irrelevant to it’s price in real terms. A weaker US dollar simply means that Americans are hit harder than people in countries with stronger currencies. The fact that oil has increased in price in all currencies demonstrates a (huge) rise in price in real terms.

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Thats not entirely true Andrew,

The oil price rise is part real and part nominal.

Supply is increasing faster than demand, but at the same time the unit used to value oil (USD) is having its value trashed.

Price oil in something other than USD and you would see that it hasn’t risen nearly as much as you think it has.

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The optimist suggests that a move to oil alternatives such as electric vehicles could bring the demand for oil down, thus reducing the price. The figures I’ve found for NZ suggest that for us to power the transport network and shut down out coal and gas stations to reduce GH emissions and meet overall power demand from normal growth we’d need another ~8000 MW capacity.

If that’s right, how is that shortfall to be met, or do we sacrifice economic growth?

turnip, the oil price rise is real, not nominal.

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Well unless the federal reserve stops printing money then the price of oil will continue to rise, so who knows the sky is the limit.

Of course at some point the Oil nations will have to start pricing oil in something other than USD so we may get some stability again.

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OK,

Here are some of my reasons for choosing a pessimistic price of $6 per litre for petrol in 10 years:

1) Global demand for oil will continue to increase
2) Existing oil fields will be depleted, and new discoveries will not be able to keep pace.
3) Wars over oil will become more common, disrupting production and transportation of oil.
4) Countries with oil will deliberately limit production for political purposes.
5) Environmental taxes etc will add to the price

Maybe my $6 per litre (whatever that works out as per barrel or oil) is optomistic?

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My guess is about US$35 a barrel, if there is substantial investment in drilling over the next decade. If environmentalists have there way, and there isn’t, then there will presumably be at least substitution for other energy types. In that case I would guess perhaps US$70 a barrel.

For petrol in New Zealand, I predict it will be about 30 cents per litre, plus tax, i.e. around $1. Bear in mind that even with our current power prices, an electric car can be run for the equivalent of about 30 cents per litre. Given that it looks highly likely that electric cars will be part of the mass market in 10 years, petrol will need to be competitive with that.

Taking a more extreme view, if there is widespread substitution, then oil might fall to $5-10 a barrel, with only Saudi Arabia and a few others still pumping. I think this is unlikely in the 10 year timeframe, since the 3rd world demand will still be high. In the longer term, however, oil is likely to be a niche product, a bit like parafin.

Don’t bet on $300 a barrel. Environmentalists are going to have to find another way to wean us off energy.

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“Most experts willingly acknowledge that the current prices don’t reflect the fundamentals.”

It’s hard to know what you mean by “fundamentals”, or whether you mean anything coherent at all. This isn’t like buying stocks where we compare price to earnings, or housing where we compare prices with the cost of building and income from renting, or a currency where we compare likely interest rates with value of the currency.

As for “hedging dollar risk”: nope, can’t see it. You can’t hedge dollar risk on the spot oil market. You can on the *futures* market. But futures prices don’t set spot prices. That’s the underlying flaw in all this talk about speculators driving up oil prices: speculating in oil futures does not drive up the spot price.

Because those who buy oil futures as speculators must bail out of the market and sell before the contract falls due, since they don’t want to have a million barrels of oil dumped in their boardroom. Only if there was sufficient demand for actual oil to actually support the current spot price would spot prices be that high, irrespective of the acts of speculators.

Speculative bubbles occur when people buy an asset expecting the price to go up, and then hold the asset until they sell to someone who is buying it at an even higher price because they expect the the price to go up even more. The profits made by the few can then cause herd behaviour where everyone piles in and buys some, creating a self-fulfillng prophecy that prices will rise until it gets out of hand and the bubble bursts. This involves lots of people buying AND HOLDING the asset. You can do that with a currency easily, or with housing or technology stocks. You can do it with oil futures. But you cannot do it with spot oil contracts – ie actual oil – unless you’ve got space in your backyard to put a million barrels of oil and people just don’t.

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Here’s a useful summary that I can’t fault: http://europe.theoildrum.com/node/4224#more

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I’ll guess what the petrol price is in ten years, in todays dollars (ie before inflation):

NZ$6 per litre.

Don’t ask for justification for this guess, I can’t give you any. If I were betting a crate of beer on the price, this is what I would choose.

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This article written in 2001 brings the issue into a whole new light.

We are sooo doomed.

http://www.guardian.co.uk/business/2001/jan/14/globalrecession.oilandpetrol

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