DOING SOME DIGGING – The ups, ups & downs of the oil price

Any reader afraid of heights is advised to skip down a few paragraphs. We are going to consider the record-high pri...


Any reader afraid of heights is advised to skip down a few paragraphs. We are going to consider the record-high price of oil. Crude oil prices are hovering just below the US$60 per barrel mark. This comes after what we thought was a record-high price of US$54/bbl early in April followed by a US$10-drop in May.

High prices are a double-edged sword. Mineral producers, especially those with large truck fleets and diesel-powered generators, are going to have a tough time keeping costs under control. Other industries too are struggling. According to a survey done last April by PricewaterhouseCoopers (PwC), rising oil prices are responsible for slowing the growth of one in three large U.S.-based multinational corporations. On the other hand, high prices allow the petroleum sector to plan massive capital expenditures. Another PwC survey puts spending in the oil sands sector at $61 billion on new projects over the next 10 years. High oil prices also fuel the market for renewable energy sources.

Several factors are cited for the rise. Demand has soared in China, India and the United States. Experience teaches that once a country becomes oil-dependent it is unlikely to want to go without. Some analysts fear a shortage. (Remember the early 1980s?) Another war in the Middle East would cut output from those producers.

CAN DEMAND CONTINUE TO GROW? - That is the question. On June 17, Toronto-based published a report that oil demand in China is slowing already. Is this the beginning of a cyclical downturn for all minerals?

Mining companies know their industry is cyclical. For the last two years or so they have enjoyed high prices for nearly all metals. That all commodity prices should hit the high part of the cycle at the same time is unusual. My fear is that all prices will drop to the bottom of the cycle at the same time, forcing higher-cost producers out of business quickly. If that happened, only the most cost-conscious would survive.


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