Dallas

As a relatively simple person, I tend to think of things in pure supply-and-demand terms, so for my tea leaves, I love charts like this one from the recent Dallas Fed prognostications. They put out a chart which, even if wrong, fills me with chart-porn simplistic glee:

Charts like this are just gorgeous in the depth of information that they project with so little ink. Whether the curves are correct or not, the important things are:

• The demand curve has shifted to the right
• The supply curve has shifted to the left

This is the textbook scenario for higher sustained prices. If you believe the basic premises behind the curves, $100 oil means either:

• Supply is completely constrained - not a curve, but a vertical line
• Demand is much more inelastic - more vertical, less curved

They go on to suggest four scenarios; two of which will drive prices higher, and two of which will push oil back under the magic $100 mark:

• Oil production reaches a plateau or peak-prices likely to rise further
• Oil nationalism continues to slow the development of new resources-prices likely to remain relatively high
• In a shift of strategy, OPEC increases its output sharply-prices likely to fall.
• Aggressive exploration activities pay off with the quick development of significant new resources-prices likely to fall.

Their somewhat rosy conclusion is that recent backwardation in oil is predicting that the last two scenarios win out. But this doesn't make too much sense to me, especially given the fact that backwardation has been bled out of the market since the Fed published the letter earlier in May. With the IEA jumping on the peak oil bandwagon and Crazy Uncle Hugo dealing with skyrocketing inflation and doing everything he can to continue his power consolidation, I don't see those two helping out anytime soon. So that leaves OPEC and exploration.

Indonesia

Indonesia is kind of the poster child for how crazy all four of the Dallas Fed's drivers are when faced with the real world. Last week, Indonesia pulled out of OPEC for the simple reason that they could longer hold up their part of the E - exports.

Indonesian oil has a long history. They were one of the first to join the cartel back in the ‘60s, and they used to be a big deal - as recently as 1998 they were pumping 1.5 million barrels per day; today, about half that. For years now Indonesia has actually had to import oil to keep up with demand, a situation made worse by a long-standing government subsidy on petroleum products. To coincide with the pullout of OPEC, the Indonesian government is also raising the price of gas, in a (likely vain) attempt to stabilize the government's deficit laden budget. It's still subsidized though: Gas is currently sold at 75% of its actual cost.

The bottom line is that Indonesia is running out of oil - "drying up" as Indonesian President Susilo Bambang Yudhoyono put it. You'd think with $100+ oil that there would be massive investment going on, but the world's oil companies may have learned a lesson. In country after country (Nigeria, Indonesia, Venezuela), issues of corruption, civil unrest or overreaching nationalism have burned the hands of big oil. How many times does Hugo Chavez have to beat up ExxonMobil before they just give up investing in the third world? So the idea that an economically crumbling, rapidly destabilizing Indonesia will be a fat target for investment seems farfetched. Exxon already couldn't break a deadlock on managing the Natuna natural gas field.

How different is the situation in other OPEC countries? Hard to tell, as all we can do is read the headlines. But given the gamesmanship and general dysfunction of OPEC, and the apparent inability of the cartel to get much more E out the door, I don't see where the Dallas Fed gets proved the smartest guys in the room. The fact that exports are down 2.5% in a year where prices rose 57% is a staggering denial of the idea that OPEC can slush the market.

Love the charts though.

P.S.: The second somewhat rosy (!) perspective from the Fed is this: At least we don't live in the 1800s! Americans aren't working as hard for their energy as they have in the past, if you go really, really far back. I know I feel better now.