Article Tools
When it comes to the future direction of oil prices , market watchers are as divided as Lilliput and Blefuscu, the fictional island nations in Gulliver’s Travels that were permanently at war over the proper way to crack a boiled egg.
In one crude camp, there are the followers of peak oil theory—like Toronto-based fund manager Eric Sprott, who doesn’t think the market is about to crack. Indeed, according to the Bay Street legend, the world has just seen the beginning of high oil prices. Plenty of industry watchers agree with the peakers. Jeff Rubin, chief economist with CIBC World Markets, thinks oil prices will reach US$200 per barrel sometime in the next half decade. Analysts at Goldman Sachs project a much shorter trip to what is being billed in the media as “Oilmageddon.” Billionaire George Soros is less apocalyptic. “We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble,” he recently told American lawmakers looking to somehow rein in speculators who are being blamed for pushing U.S. oil futures above US$135 a barrel last month. “To be sure, a crash in oil markets is not imminent.”
Market bears, on the other hand, think oil is boiling like a pot of overdone eggs. “Investors,” says a top-tier Toronto hedge fund manager, “are safer betting on Nortel,” because crude prices are bubbling like the telecom’s market capitalization back when commodity plays were considered a poor place to park money.
According to major U.S. investment bank Lehman Brothers, money managers from pension, endowment and sovereign wealth funds—with more than US$90 billion to invest—have herded together over the past two years, trying to avoid equities and bonds and fight inflation while chasing the past performance of commodity index funds. And that has created a classic asset bubble.
“This is the most obvious bubble I have seen since we poured Little Mermaid bubble bath into the tub with the water running and my daughter squealed with delight at the resulting foam,” insists Wall Street economist Robert Brusca, who predicts crude prices at recent levels will lead to a global recession, forcing demand to drop sharply. “There is no doubt about it,” he says. “It is true and obvious that the world economy cannot continue to grow at this level of oil price.” “Don’t listen to the bulls or the bears,” says a Toronto political economist. “Wait until after China has rebuilt its damaged communities and hosted the Olympics. By then, some downed refineries should be back online and the supply-and-demand picture should clear up.”
In the meantime, don’t expect the world as you know it to return to how it was when oil was US$30 a barrel. After all, even if prices fall dramatically, the spike has already left a permanent bad taste in certain industries that are rethinking business models exposed to high fuel costs. Airlines, for example, are considering weighing customers to charge them by the pound. Meanwhile, automakers are frantically dropping the dead weight from their product lineups.
At press time, angry workers were blockading General Motors of Canada headquarters in Oshawa, Ont., where in early June the company announced plans to shutter an award-winning pickup truck plant. The Canadian Auto Workers union thought that operation was protected by a new contract it negotiated just weeks before. But industry analyst Dennis DesRosiers points out that GM’s carefully worded contracts have clauses that allow the company to react to changes in market conditions, and GM and other automakers have been sideswiped by a sudden radical shift in consumer preferences.
Thanks to soaring fuel costs, auto sales in the United States have shifted from being almost 60% light trucks (SUVs, minivans and pickups) to almost 60% passenger cars in just six months. Unlike SUV sales, DesRosiers says pickup demand could bounce back somewhat when the U.S. housing market recovers because he “can’t see some redneck in Montana driving a four-door sedan.” But even if consumers return to the truck market, the analyst says the GM cuts in Canadian production will probably be long-term since the strong loonie and a failure by the CAW to match U.S. worker concessions have simply made Canada a less attractive place to build GM cars.
Rate this article
