The story that never happened
A combination of economic and political considerations will soon bring the price of oil back down, says Mishal Kanoo
Oil! Three little letters that can cause havoc. These same three letters can put a smile on one man’s face and make another plunge from a skyscraper. Yet we are fascinated by this thing that most of us have never seen and will never use as a raw commodity. I predict that in six months time, the price of oil will hover around US$45. Economically speaking, this is the right price for oil to be, and I will explain why.
A few months ago, I noticed a chart that did not make sense to me from an economic point of view but made perfect sense from a political view. The last quarter of 2003 saw oil rocket from around US$25 to its high of US$78 a few weeks ago. Now it is moving down. But why did it shoot up at such a rapid pace? As far as economic factors are concerned, the price of oil should have spiked before the Iraqi invasion. It did. But after the war was over, the price should have calmed down to below the price before the war. It did not. In fact, the price of oil kept on barreling its way up to the point that it passed the doubling of its global price within two years. This is a strange phenomena considering that not only is oil a commodity, but nothing significant had changed globally to push it so high. I had heard the argument that China and India were fueling this price increase, but both India and China were well into their growth programmes before the turn of the Millennium. Their impact would have been factored into the price going forward. To counter this argument, both US and Europe were facing slowdowns.
As far as the political scene is concerned, significant factors occurred. The US took over the Iraqi oil fields and for two years, the administration of the Iraqi government. This meant huge contracts to major players in the oil business from all angles. Also, remember that the only two oil futures trading centres in the world are in London and New York. Thus, manipulation of prices can easily be accommodated to suit certain people’s pleasures. This, and the fact that the US administration made fighting “terrorism” its main target, meant that the internal US increase in the price of gasoline would not have an effect since most Americans were scared into believing external terrorism was more important to them than the economy, as the polls proved throughout 2002 to 2004. Thus, all the factors to see oil skyrocket upwards were there, and politics always trumps economics. This resulted in the greatest boom in our local GCC markets that we had seen in a while. I would say nearly as significant as the seventies boom. Money was flowing like manna from the sky. We had no idea why it was happening, but by God, we were ready to take full advantage of it.
So, now you might ask, why is the price of oil going down? Again the answer is both economically as well as politically based. But as the reason oil went up was political, so will its downfall be the same. In November, the US government goes through an interim change that may affect the leaning of Congress. A Democrat win would mean that the legislative branch of the US government is held by opponents of the Republican US Administration. The Democrats will be positioning themselves for the Presidential Elections of 2008. The easiest way to do so is by attacking the Republicans on Iraq, which they are doing, and following this up with lowering the price of a gallon of gasoline in the US. This will happen by setting up committees to investigate everything from non-tendered contracts in Iraq, to outlandish spending on defense contractors, all who are heavy supporters of the Republicans. From January next year, the Democrats will push the price of oil down.
Economically speaking, anything that goes up like a rocket, comes down like a bomb. There are no economic factors to keep the price so high. Indeed, there are more economic factors to push the price down - the US is sitting on a huge pool of oil, and recent discoveries will ease supply worries. This will calm oil traders, so futures contracts will push prices even further down.
So what does this mean for us here in the GCC? Well, I hate to say it but the writing is on the wall – say goodbye to the wow-times and say hello to the okay-times. All of what we have built for is slowly coming to a slowdown. We will still see projects announced, but now they will be tempered with a bit of reality.- Mishal Kanoo is deputy chairman of the Kanoo Group.
