The ‘what ifs’ in oil prices

Scott Tong Mar 6, 2012

Kai Ryssdal: We’ll get to the campaign in a bit, but we begin today firmly in the world of commodities. Not only were stocks down today — the worst day they’ve had in a month and a half — but so too was gold, and oil as well. Crude in New York dropped $2 a barrel today. Sky high to merely high, you might say — Iran and the various ‘what if’ scenarios are the proximate cause.

At a major energy industry conference down in Houston, the people whose job it is to worry about oil prices are worried. Marketplace’s Scott Tong is there. Hey Scott.

Scott Tong: Hey Kai.

Ryssdal: So you are in the center of the oil universe, down in Houston today. What’s the collective wisdom down there about prices and stuff?

Tong: Well when they talk about prices and uncertainty, the thing they say first of all is, they’re always dealing with geopolitical uncertainty. I mean these oil guys, they don’t get to choose where this stuff is. It happens to be under the deep ocean, in the Middle East, Russia, North Africa, Venezuela. So that’s the nature of the business to start out with. Right now, they are antsy about whether there’s enough in the world, the supply; they’re worried about tightness. And right now, with Iran, there’s talk of sanctions, boycotting Iran, the possibility of an Israeli attack. So that means Iran’s two-million-plus barrels of oil every day are in question.

I just spoke to Bhushan Bahree at the energy consultancy IHS Cambridge Energy, and his technical term for all this is “fear factor.”

Bhushan Bahree: If there is a disruption in supply from Iran or from a wider Middle East region, we may not have enough spare capacity to cover that immediately. Nobody has, at that moment, suggested there will be such a huge disruption, but people worry about bad things happening.

Of course, in the category of bad things, Kai, I could include a whole lot of things that folks here consider a little overhyped right now.

Ryssdal: Yeah, but you look at the list of things that could happen, right, from Syria to Iran to whatever it is in the Middle East. They must have some scenario that they planned for, some worst case scenario, right?

Tong: Well there are a number of scenarios. A quarter of the world’s oil ships through this Strait of Hormuz. So if there’s an attack, Iran could try to block it, and that would cut off a lot of the world’s oil. But most think that’s kind of unlikely. Before that happens, some analysts think an attack could freak out the insurance companies that are insuring the ships, and that could drive up the costs and halt some of that traffic. Or if Iran counters by going after refineries in Saudi Arabia or natural gas facilities in Qatar that some are thinking about, those are all these ‘what if’ scenarios that they say, you know, that could drive up prices. Crude oil could go up $50 more, 40 percent higher than it is now.

Ryssdal: If they go up that $50 a barrel from where they are right now, that puts them above record highs, and then what happens to this recovery thing we have going on?

Tong: I think it depends on how long that goes. I mean, I talked to a couple economists and they say if it’s a couple weeks of freakout, it may not have a long-term effect. But if it’s longer than that, you’re right — all bets are off in the global economy. The interesting thing, economists say, is high prices for a long period of time tend to kill demand in the long term — you know, with gas at the pump $4, $5, people tend to change their behavior — they drive less, they buy more efficient cars, which might push prices down in the long term. And there’s already talk of that at this conference. The overused word in a lot of these sessions is “energy supply revolution.” There’s a lot of new technology, which means companies can get a lot of it out of the ground and supply can out-race demand. So that’s a longer term question going forward.

Ryssdal: Marketplace’s Scott Tong, down in Houston, Texas, for us. Scott, thanks a lot.

Tong: All right, you’re welcome.

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