The same now, and perhaps win
new affection from the worlds leading economies.
Meanwhile, though, Verleger thinks that oil prices will crash. Markets
overshoot when one is trying only to fine-tune them, as the Saudis are,
he argues -- which is the basis for his forecasts of $40-a-barrel oil
and $2-a-gallon gasoline by November.
To the degree that such fire-sale prices are long-lived, they could
cause mayhem among petro-rulers. While Verleger thinks that the Saudis
can maneuver prices back up when they want, the very nature of a crash
demonstrates that markets can be uncontrollable.
But the Saudis are willing to suffer the consequences, knowing that their own financial reserves (some $700 billion) give them staying power. "The Saudis are able to look at the long term," Phil Flynn, an analyst with Pricing Futures Group, told me. Citigroups Morse thinks that prices can fall further from where they are now, but not as low as Verleger forecasts because, he told me, todays market conditions are different from 2008 -- the decline in demand is bred 11s not as steep, and inventories are not as large. "There is a good chance Saudi Arabia continues to produce enough to force [a rise in oil inventories]. And theres a good chance, between Europe and China, that demand growth could come to a halt," Morse said. OPEC might respond by reducing production, but its actions would be late. "Add to the scenario no more supply disruptions (or only modest ones) and no military conflict involving Iran," Morse said, "and prices could fall another $20 a barrel fairly easily." Low oil prices can have serious social impacts simply because, with less free cash, people tend to start more closely scrutinizing their surroundings -- and when they become unhappy with what they see, they start looking for a scapegoat. The conditions that. |