By Sreekumar Raghavan
Which is the most misunderstood commodity in the world? Gold? ...Silver? According to renowned energy expert, Phil K Verleger Jr, neither of them is true. Petroleum is the answer. Back in May 2008 when petroleum prices were peaking, he said that price of crude oil in summer of 2008 should be $70 and not $140 per barrel. He is again addressing an audience at the University of California, San Diego Economics Roundtable on “Why the price of Oil should never exceed $80 a Barrel?” on February 19.

Indeed when one examines the reports and papers published by Verleger, he seems to be refreshingly different from the run of the mill analysis that the media churn out every now and then.

He has squarely dismissed the argument that speculation had led to the oil rally that saw crude prices zooming to $147 a barrel. The Economist also commented that “most speculators do not own real oil. Every barrel they may by in Futures market they sell back again before the contract ends. This may raise the price of “paper barrels” but not the of the black stuff refiners turn into petrol”. Verleger’s argument is that world now needs more of light sweet crude which is now in short supply (based on his paper published in July 2008). Secondly, Europe wants more of diesel and jet fuel.

To satisfy the demand for more diesel as European tax policies encouraged more use of diesel, refiners had to look for a better way of producing it at cheaper cost. The answer was found in light sweet crude oil that is in plenty in Nigeria, Algeria and USA. While Iran had more of high sulphur crude oil which was difficult to market. To make matters worse, adverse geo-political events led to shortage of light sweet crude from Nigeria. According to Verleger, European, US legislation mandating use of low sulphur had led refiners to opt for light sweet crude and resulting shrinking supply.

A specialist in the study of energy commodity markets, Verleger is author of more than 100 articles and books on this topic and is highly regarded as an expert witness in private disputes as well as an independent authority, who is frequently called upon for Congressional testimony on oil, gas and other energy topics. Therefore, it would be interesting how after a break, Verleger would explain the present fall in crude oil prices and as the topic of his talk suggests it could be quite revealing and interesting to follow.

President of PKVerleger Consulting and senior advisor to The Brattle Group, a Cambridge, Mass. economics consulting firm, Verleger received his Ph.D. in Economics from MIT. He said that unless recessionary trends or meltdown brought forth lesser demand for diesel, the rising crude trend would continue.

A couple of years ago, those who forecast that oil would reach $100 a barrel were seen either as doomsayers or publicity-seekers. Now some are predicting $200 oil—and are taken deadly seriously, the Economist said. Now modern day analysts or Nostradamuses are not willing to take a risk and predict which way the crude could go in the medium turn to long term although several are betting on the star performer,gold.

We need perhaps more intelligent and in-depth analysis of the type that Verleger brings forth than the run of the mill analysts who attribute the near term fall in prices or hikes to dollar, Dow Jones up and down movements. According to OPEC, world oil demand is expected to be see continued negative growth of 0.2 mb/d.OPEC is going for further drastic cuts in crude oil output to counter the falling prices, but no one looks sure. That is why oil industry may be looking forward to his February 19 presentation.