Hey Oil Bulls - How Long Till Increasing Oil Prices and Strengthening Dollar Start Killing Demand in Developing Countries?

Just a gentle nudge about something I've repeatedly commented about this year...

As oil prices nudge higher, the growing consensus seems to be toward $80 oil prices (Brent, not WTI).

My own view is $80 oil is not sustainable, it is too high.  My preferred range that I view as sustainable this year is around $65.  Note, that $65 number is not my prediction, it's what I see as a reasonable price range that is not too high to hurt many global economies, and not low to hurt many oil producers.

Anyway, here's the gentle nudge:

Why Higher Oil Is Hurting Emerging Markets So Much (USO)

Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff.


But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position.  

... To sum up the dynamic: Rising oil prices lead to disruptions which force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

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Developing countries want to get the price as low as possible and they're starting to organize... I hope they will do that buyers club thing and work closely with the US as a means to lower the prices from OPEC and Russia. The prices are artificially high due to OPEC cutting output and are at a level that is unjustifiable, especially at the era of electric vehicles.

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But remember that in Brasil the autos are designed to run either off gasoline or off ethanol, manufactured locally from sugar cane.  Assuming there is enough of the stuff, as oil gets pricier, you have product substitution with the alcohol.  OK< that does not resolve uses of diesel, lube oil, greases, other industrial chemicals, and plastics feedstocks.  Yet, gasoline and transport fuels are the big heavy hitters, so as that oil transfer price continues to rise (with an appreciating currency to work against), you can anticipate a sustained shit to a compatible drop-in fuel. 

Will product substitution save Brasil?  I dunno.  But it sure can't hurt to have that nice fat stock of alcohol out there. That cane grows fast enough. 

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(edited)

In a new world where the production of oil is directed more to chemical industry (those future cars maded of zylon and carbon fiber reinforced thermoplastic are basically oil) the alternative biofuels powered cars are dead, because we have not only the gulf that dominated the oil and gas production. All agrofuels, and agriculture based plastics are more expensive, and very likely worse for the enviroment, using wood emits 3 to 4 times more carbon dioxide than LPG

"We" also have a lot of (future) competitors in the new fields, Russia, Argentina, the US, Canada, Australia, some parts of Africa, those countries have shale, and offshore oil, and with technology improving everyday is possible making oil cheaper, even if all priced were leveraged there's going to be a country offering cheaper oil to sell more.

You know why Russia is so concerned with Nuclear floating powerplants? because they could produce electricity at 20 U$S/MWh, that lowers the cost for extraction of oil providing the platforms with cheap energy to make more cheap energy...

In the years to come the extraction of shales trough Water, and be replaced with supercritical CO2, heater at high temperature and pressure, and then cooled down to make the Oil condense and the co2 evaporate to be compressed again.

Demand isn't going to being reduced, since 2014 the oil consumption raised from 76 million barrels a day to 99 million barrels a day and is going to be like that until the 2100's. What's going to be reduced is profits, the days when a country produces a barrel at 30 dollars and sells it at 100 or 140 are over. There's just more competition.
 

Edited by Sebastian Meana
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Tom,

When you speak about the reasonable price of USD65 do you have WTI or Brent in mind?

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2 minutes ago, Groovy said:

Tom,

When you speak about the reasonable price of USD65 do you have WTI or Brent in mind?

Brent. 

WTI is a different animal altogether.  

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Brent and USD should not be going in a same direction, if one considers crude as a commodity. But they do lately - makes you wonder about that The Big Oil  Long theory of Chris Cook and tie between crude and USD (not the petrodollar). 

Strong dollar may be enough to crash emerging markets; high energy cost will make it happen sooner

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1 hour ago, DanilKa said:

Strong dollar may be enough to crash emerging markets; high energy cost will make it happen sooner

Yep. A strong USD combined with too high oil prices will eventually throttle global economies, and cause oil prices to eventually drop again.

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35 minutes ago, Tom Kirkman said:

Yep. A strong USD combined with too high oil prices will eventually throttle global economies, and cause oil prices to eventually drop again.

Except this time it may be different from boom-bust cycles of the past. Global economy is so fragile with $247T in debt - its unraveling seriously frightens me. What gives some comfort - people will still need energy and I know how to extract it from the ground. 

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