Crude will cost $200 in October 2008

It is obvious that the price of oil will never go down and will only continue to go up.

At times it may be a faster or a slower rise, but we should accept it as a definitive fact of life. Some experts say it is caused by speculations, others say the reason is a weak dollar, some blame China (as usual) and its increased consumption, while some politicians try to calm/fool us by calling it ‘just a simple panic in the market’.

All the above explanations reflect only a superficial understanding of the current situation. They show a growing tendency of simplistic approaches to business thinking in recent times. In the last 20 years or so, many important aspects of our life are being explained with a short, almost gimmicky, definitions: 'Globalisation is good for the world', 'To cure stagflation we print more money', 'China is causing a rise in commodity prices', 'Crude should be at the $50 level', 'Crude is up because of fire in a refinery', etc.

The truth is that oil costs more now because it was under-priced, abused and wasted for too long. Now is the transition time when we are witnessing daily corrections of that situation and many do not like what they see.

Price of crude will be self-explanatory if we look at some examples:

* Until a few months ago, the price of petrol was equal, or even cheaper than the price of bottled water or a fizzy drink in a supermarket? How complicated is to find water, purify it, bottle it and transport to customers compared to petrol?
* One small bag with 150gr of potato crisps was until recently double the price of petrol, making 1kg of crisps 12 times more expensive than petrol? What are the costs to grow potato, process it into crisps and deliver to market compared with petrol? What is the real value of crisps compared to petrol?
* The prices of 1kg of ordinary apples or tomatoes in a supermarket were until recently 100-200% more expensive than petrol? Where is the logic?

Price of crude is poised to reach $200 in a few months and that is where it will stay for a while – at least until the Spring 2009.

I believe that having oil at that price will do us all much more good, compared with the times of cheap oil:

* Many world prices will have automatic corrections, like energy, petrol, transport, food, FMCG;
* These corrections will generate more production locally. It will become uneconomical to buy and transport 10,000km anything which could be produced locally;
* We will all start to save on energy, petrol, wasteful traveling and wasting food, at the same time finding local sources, developing local production and going for holidays locally;
* More countries will reopen old oil fields which were uneconomical to exploit or find new ways to get oil locally;
* Substitution for oil will get a tremendous boost - many more nuclear power stations will open in developed countries, solar energy will be used in underdeveloped countries, coal industry will have its come-back in many countries;
* Science will start to work overtime to find the best ways to replace oil as a raw material for our transport needs and ways to reduce pollution of coal;
* Many air companies will continue to scale down their operations. Charter companies will reduce the number of flights or even close. The price of flying will become a prohibitive factor for many and at the same time new technologies will enable us to do the same work with much less traveling;
* Consumption of oil will go down and pollution will go significantly down at the same time;

Many of the above points are not acceptable only for:

* Oil lobbies; and
* The big, monopolistic and a very wasteful global oil companies.

This is why they are putting the pressure for oil price to go down, insisting that oil producing countries should increase output to the point of glut, and that governments should give them tax breaks. Most of the reports about the imminent world recession are produced by these powerful players.

Revaluation of Chinese currency?

US is pressing for revaluation of Chinese currency not exactly knowing why they want it.

Explanation, that revaluation will reduce the trade deficit with China is not valid, as most likely the real effect will be the increase of the USA deficit. Reason for the increase of deficit is very simple – for Chinese companies US dollars earned by exporting will bring less in local currency, they will ask for the price increase, but all the raw materials produced locally will adjust to the new lower levels, therefore making exports to USA even more profitable.

Another silly explanation, that revaluation will increase sale of USA goods to China is not valid as well. The true consequence of revaluation will be that China will import even less goods from USA, and any other country, because they import only what they really need and what they can not produce in China. Why should Chinese consumers pay even more money then today, in local currency, if they can get the same or very similar goods from local suppliers at much better prices?

It looks like USA is pressing for revaluation with the only one idea in mind – once China revaluates its currency all prices and salaries in China will go up for at least that much, preferably even more, and that will make automatically Chinese goods not competitive in the world.

All the above is wishful and childish thinking which has nothing to do with the real world and especially with China. It is obvious that bureaucratic experts in USA still do not understand China, how it works and how it thinks. They are applying their way of thinking as a pattern which is valid for all. If someone thinks differently, they just keep repeating their own story, believing that one day it will persuade the other party to start thinking as they say.

Fortunately for China, they are following their own way of thinking and for now they are winning almost every time.