Well, now we know. Interviewed by the Financial Times on Monday, Alan Greenspan rejected the widely-held belief that central banks are now independent. Throwing aside his normal caution, the former US Federal Reserve Chairman said quite bluntly that ‘the presumption that we were fully independent and have full discretion was false’.
This is a worrying statement, as the concept of independence from political control is integral to the market’s confidence in the ability of central banks to control inflation. It is therefore perhaps not too surprising to find Greenspan also commenting in the same interview that he ‘sees oil going to $100/bbl’.
Coincidentally, on the same day, Goldman Sachs (GS) provided a potential rationale for this scenario when they issued a report that raised their 2008 oil price target to $95/bbl. They see the key driver for this increase as being the fact that ‘the oil industry has added very little new, low-cost, production capacity as it has run into technological and political bottlenecks that will likely take years to resolve’.
GS also believe that ‘costs have continued to rise, pushing marginal costs closer to $70/bbl’. If they are correct, this represents a sea-change in expectations. All through the early 1980’s, we in the chemical industry argued that with marginal production costs only $5/bbl, it was inconceivable that oil could remain at the then current level of $30/bbl in an over-supplied market.
But if Goldman’s analysis is right, then we will soon be in the opposite situation. Heavy crude now accounts for much of the world’s current spare oil capacity. Many refineries cannot process it, making effective supply/demand for lighter crudes much tighter. And in these circumstances, it is the marginal cost that will again set the price.
This could have ‘severe’ implications for polymer producers, as Goldman’s James Yong notes. He foresees a potential ‘squeeze coming from both the feedstock as well as the polyolefins side’, as feedstock costs rise just as the new Middle East/Asian capacity starts to arrive next year.