Oily Thoughts of the Day- Of Turkeys and GOBBL lines

*Is it Midnight at the Oasis Yet? Not Quite! *


As I work on this blog, the price of crude oil has dipped below $112. Market analysts attribute the rise to a strengthening dollar and deepening concern about global demand. Crude has thus declined 25% from its speculative peak in mid-July.

The forward curve has dropped by a roughly equivalent amount. This means that hedgers can lock in delivery positions for the next few years well under the GOBBL line. Somewhat tongue-in-cheek, I would define this as the “Going Basically Bankrupt Line”. Now one can hedge above the GOBBL. But this commits you to buying oil and its refined products at price levels that make no sense, because you will be going out of business when it becomes time to pay.

The prudent speculator never wants to see oil push through the GOBBL line. OPEC certainly doesn’t like it. But human nature being what it is, once the fever takes hold, it tends to go all the way. Once the perception spreads that wild price increases have catalyzed increased elasticity and thus a drastic curtailment of demand on the part of oil consumers, the state is set for a classic and rapid bubble burst. Which seems to be happening. It is very noteworthy that oil’s decline is continuing despite continuing unrest in the Middle East and the Russian invasion of Georgia. Political instability near the producing nations generally propels price increases. So the trend is VERY encouraging.

Still, we are not out of the woods yet. Oil is still quite expensive at $112 and a boon for producing countries, many of whom are hostile to US interests.

And there is always a risk that short term relief may encourage us to relax efforts to fix the dangerous problem of our reliance on foreign sources of energy. Part of the reason why we got into the mess in the first place is that American society gorged like fattening turkeys on relatively cheap foreign oil. Some people claimed to be surprised when the turkey farm owners came with the, er, ax.

Our political leadership must take advantage of the respite and do its duty. This nation must develop all three prongs of a sensible energy policy: increased drilling, increased conservation and increased use of alternative energy. If we don’t, it will be turkey time again.