Mr. Puplava: When we last spoke, everything was collapsing. When you take a look at the lift-off in all commodity prices earlier in 2008, when we saw oil go from 100 a barrel to 147, that was remarkable in itself, and I think took the world by surprise. What was even more remarkable was that in a period of four months or five months, oil dropped from 147 to 32 a barrel, along with steep declines in other commodity prices.
Last year as the price of oil kept climbing from 100 a barrel and went to 125, 145, and 147, there was a government commission that was drawn together with seven agencies-everything from the CFTC to the Energy Department, the SEC, and the Federal Reserve-and they took a look at the issue of oil. They wanted to know: How did we get here? How did we go from 20 oil to-at the time of the commission study-over 100? What I think really is key to understand here-and it's also going to be the key to understanding the price of commodities going forward, especially oil-is there were a series of "bottlenecks" in supply throughout this decade. The "how" simply boiled down to this: demand was growing faster than supply.
Supply, despite higher prices, was unable to keep up with and meet demand and so you would get bottleneck. As a good example: the earthquakes in China at the beginning of 2008 shut down quite a few of their power plants, and forced China to go into the open market and buy diesel fuel to generate power. The US itself imports a considerable amount of fuel-I think it's close to 3 million barrels equivalent of gasoline, jet fuel, and diesel-so in addition to the US being a large consumer of petroleum products, China started moving in as a significant consumer of the finite amount of available supply. If you want to go back further, we can look at the hurricanes Katrina and Rita, which shut down not only oil and gas production in the Gulf of Mexico, but also the refineries there. So we had these series of bottlenecks in supply that developed over a period of a decade and the world had to come to grips with something that we hadn't dealt with before: supply, despite higher prices, wasn't-couldn't-keep up with demand.
If you take a look at China, China has become the world's third-largest economy, and there is talk that by next year China will move up the ranks to become the second-largest economy in the world. Ten, fifteen years ago, these were things we didn't think about. We didn't think about emerging market industrialization or emerging market urbanization, which require larger amounts of resources. So this decade's bottlenecks grew out of the inability of supply to keep up with the considerably increased demand from the development of emerging economies.
The increased demand from emerging markets is why I believe the sharp drop-off in commodities we saw last year had more to do with deleveraging and "fear liquidations" than it had to do with any real change to the supply/demand picture over the long term, although we did have/are having a dip in supply in the short term.
It wasn't until the financial crisis became full blown, especially after the bankruptcy of Lehman Brothers, that the credit crisis began to spill over into the economy and temporarily affect demand for various commodities. The drop-off in demand came as a result of lower GDP, with the US and European economies going into a recession, but more importantly, as a result of the slowdown in growth in the emerging world economies. So there was a brief period of respite from the supply/demand crunch. But once the financial crisis was stabilized, commodity prices began to rise again, since there is still a long-term supply/demand imbalance. For example, on the day you and I are speaking, we are looking at West Texas Intermediate Crude at 72 a barrel.
TWST: Now, the price of oil is in the 70 range. What do you see for the outlook going forward?
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