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| Last updated at 1:09 PM on 13/03/08 |
Speculation makes oil prices rise 
PAUL STRIDE
World energy prices, specifically oil, have been a topic of many books, talk shows, documentaries and on down to the 10 a.m. gathering at the water cooler. It’s not surprising when just this week, a barrel of oil exceeded the numerical and psychological barrier of $100, reaching an all-time high at just over $108.
A marginally connected global warming issue will find concern in many people, and most appreciate the link between high prices and our province’s fiscal prosperity. But at the end of the day everything is relative as to how it affects our personal economies — our motivations are largely controlled by our pocket books. Unless you own substantial stock in ExxonMobil, you cringe hearing the news the company earned $40.6 billion in profits. You cringe again when filling the vehicle at $1.22 per litre or finding the furnace oil receipts left in the mailbox at 95 cents per litre.
There are several reasons for the record high oil prices. Supply and demand is front and centre, with peak oil theories morphing into current estimates of time, population and consumption against world oil reserves. (Google M. King Hubbert for a closer look at this peak oil theory.)
Geopolitics is next. Since the 1970s, for example, there have been three oil crises: the Arab embargo of 1973-74; the Iran-Iraq war in 1979-80 (when crude prices hit the equivalent of paying almost $105 in today’s dollars); and the Iraq invasion of Kuwait in 1990-91. Post 9/11, we have witnessed a steady incline in world prices fuelled by wars, political tensions and hazardous weather affecting output all over the globe.
But what about speculative capital and the energy markets? The New York Mercantile Exchange (NYMEX) began trading oil futures in the mid-1980s. Today, crude is the most actively traded commodity on the planet (for those into speculation and forecasting, crude futures are available for purchase as far out as December 2016).
We are consuming in excess of 80 million barrels of petroleum products per day. Therefore, one of the largest influences on world prices are “risk premiums” attached to contracts. Many analysts acknowledge that market speculation accounts for $15-$25 of the price of every barrel of oil. (The Organization of Petroleum Exporting Countries says it’s closer to $35 .)
If we lived in a world where oil was a normal commodity, competition would dictate that margins hover just above the cost of production, which is estimated between $20-$30 per barrel on average. At the time of writing, oil is trading around $108 with a one-year high forecast of $141. Regardless of the many reasons consumers are given, billions in profits for oil producers are obvious.
So where does it all end? It does appear that we have reached the end of cheap oil and unless markets are flooded with new discoveries, prices will continue the trend upwards in the coming years. In the short term, the U.S. economy is teetering on the edge of recession, though China and India continue their insatiable appetite as developing countries. Additionally, any terrorist attack or new political tensions could further upset the laws of economics. One item of note: U.S. Vice-president Dick Cheney is heading to Saudi Arabia to ask for a significant boost in output. This may ease the markets marginally.
The rest of us, however, don’t buy barrels of crude. Instead, we fuel our vehicles, heat our homes and buy consumables that arrive here primarily by truck. And, boy, do we feel the pain. In fact, I have to fill up my car today — it’s all over but the crying.
Paul Stride lives in St. John’s. His next
editorial will appear May 8.
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13/03/08
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Danny from St. John´s, nl writes: There is one major factor that is contributing to the boost in oil prices, and that is the falling US dollar. This requires more US dollars to buy a barrell of oil. That is also , the reason that the C$ has climbed so dramatically.
The decline in the $US is due to the poor performance of their economy resulting in massive reductions in the prime lending rate by the Federal Resreve. This activity , also is boosting inflation up to a current level of 4.5%. At some point in the future , interest rates will have to be raised to kill inflation which will in turn strengthen the dollar and thus create a correction in oil prices.
If a Democratic President is elected , it is very possible that US troops will be withdrawn from Iraq and possibly Afganistan, much sooner than later.
For the reasons mentioned above, we can , also, expect to see an increased effort by many individuals and groups to reduce our reliance on oil, especially foreign oil.
It is possible that in a year from now, we will see a more a accurate picture of world supply and demand for energy reflected in oil prices.
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| Posted 13/03/2008 at 3:15 PM | Alert an Editor | Link to comment |
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Beavs from NL writes: Daniel
Thanks for the lesson in Macro Ecomonics.
Why do you insist on trying to convince people that the decline in the US dollar is the major contributor to the recent run up in the price of oil?
It is not.
It is a more minor factor, behind supply and demand, and also ranked behind the risk premium and price pressure caused by hedge funds and other speculators.
Further the Canadian Dollar is largely now considered a petro dollar . Therefore it tends to appreciate as the price of oil rises, not solely because the US dollar has declined.
Further our stronger economy and lower inflation has allowed the Bank of Canada to keep our interest rates high relative to the US.
This makes many Canadian investments more attractive relative to similar US invests. So when people invest in Canadian securities they need Canadian money, this demand creates upward pressure on the price of the Canadian dollar.
The inflation in the US is partially due to their depreciating dollar. But you miss the an important fact, the US has to import massive quantities of oil. The US is a net importer so the run up in the price of oil has been a big factor in the increase in inflation in the US.
So raising the interest rate is not a magic bullet for solving the current economic woes in the US. In fact raising interest rates right now could exacerbate the the housing crisis which is one of the main factors in the US current economic woes.
I think you are missing some of the fundamentals that are at play.
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| Posted 13/03/2008 at 5:09 PM | Alert an Editor | Link to comment |
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Will Cole from Petries, NL writes: Thanks for the armchair course in commodity economics 101 gentlemen, but nobody mentioned refining capacity, or the lack thereof.
Even if OPEC flooded the world market with crude, the product still wouldn't be processed fast enough to stave off demand. It is quite likely then that there would be little to no effect on the price of refined petroleum product.
Does this imply a disconnect between the price of a barrel of crude versus refined product?
In any event, if a refinery experiences any downtime for any reason be it weather-related or mechanical, there is the real possibility of shortages in the market served by that refinery.
This potential shortage in supply has kept an upward pressure on the price of petroleum products.
There are other factors too, such as demand in India and China, as well as the entirely unnecessary over-consumption in North America resulting from those that continue to drive that grossly inefficient monstrosity known as the SUV.
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| Posted 13/03/2008 at 10:18 PM | Alert an Editor | Link to comment |
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Rod Campbell-Ross from Sydney, NSW writes: It is amazing that so many so called experts find so many reasons why the oil price has been increasing. Most of these reasons usually ignore supply & demand, while some especially stupid commentators go further and declare it has nothing to do with the fundamentals .
I suppose the old adage that you can usually fool most people most of the time remains true.
The normal culprits for higher prices are speculation, terrorists in Nigeria, the situatiion in Iraq, OPEC, low refining capacity and a few others besides.
The fact that these same culprits were trotted out as the oil price passed one milestone after the other: - $50, $60, $80, $90, $100; and now $110 is always the same. Its is one or more of these culprits . As an economic illiterate how can the same culprit be responsible for pricing oil up to $50 and then $100 too?
Maybe it really is supply and demand; but the problem is that the so called experts do not know anything about the supply of oil; or the demand, so they write about what they have read in some other equally vacuous news article. It is a form of circular BS.
It is also a pity because it is preventing a real debate from starting about the real issue: the failure of oil production (supply) to match demand at a reasonable price (whatever that may be).
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| Posted 14/03/2008 at 5:27 AM | Alert an Editor | Link to comment |
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