Larry Kudlow thinks oil prices will drop, a lot. He’s dead wrong, again.
Real Clear Politics
A combination of market forces and government deregulation could be setting us up for a big crack in energy prices, including gas at the pump. And it may happen sooner rather than later. Many years ago, during the 1970s oil crisis, Milton Friedman argued that free markets are more powerful than OPEC, and Ronald Reagan proved the point when prices plunged after he deregulated energy in the early 1980s. Twenty years later, energy-market forces may be poised to assert themselves once more.
Oh, Larry, Larry, Larry. Wrong yet again.
Why would producers keep oil at sea at $75 a barrel waiting for prices to drop?
U.S. demand is only part of the reason that world oil prices are high. We produce almost half our need. China and India produce diddly squat [technical term]. As long as their demand goes up, world prices will too. The only producer ramping up production is Iraq and that new half million barrels is a drop in the bucket.
And they licensed a new reactor. Whoopdie doo. They haven’t even broken ground yet, much less addressed the avalanche of law suits that will have to be resolved before one electron is generated.
As for oil supplies, the amount in inventory is about 1 month of imports for the US or about two weeks of overall need. Yeah, that’ll quench demand. Ummm…, Larry, how ya gonna refine it? Refineries are near max. EIA [pdf file]
35% of that increase in capacity is China. Three quarters of the increase is due to four countries, China, the United States, South Korea and India. Only the U.S. produces any significant portion of its oil needs. The other three countries are big oil importers.
These nations are not going to stop importing oil. They are going to add refining capacity, but for their own use, not for export. That will support high oil prices since the demand will continue to exceed supply.
A year ago, Larry was praising the Chinese for their stable currency policies. The ones that keep our trade deficit artificially high and help support the Ponzi scheme that is the Chinese economy.
Nothing in Larry’s essay suggests that there is any reason to believe that oil prices will fall. He fails to demonstrate any increases in supply or any significant decreases in demand. His highly touted market forces will do what they have been doing. Keep prices high.
Bet on oil prices staying well above $40 a barrel. Don’t bet on Larry Kudlow.
