Decline in Spare Crude Capacity and Gross Under-investment in Oil

Blaming it on OPEC is just an excuse.

Sentiment and policies that suppressed the Shale revolution exhausted spare capacity, and a multi-decade secular decline in old economy fossil fuels, and lack of storage together create conditions for oil price volatility in the U.S.

The data charted below speaks volumes!

And if we now increase imports I expect a larger global trade imbalance, which increases the supply of Dollars against other currencies, particularly the Euro, if oil prices rise further. This will affect other oil importing countries too. Although, with greater supply of the Dollar, theoretically a weakening in the Dollar should make Dollar denominated oil more affordable to consumers buying in other currencies, the empirical evidence shows no such relationship as the demand elasticities are extremely small and the volatility of oil price is usually four to five times that of the currency, completely overwhelming any currency effect.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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