ariesto asked:


Oil prices have hit record highs above $145 a barrel and have more than doubled in less than a year.

There have been calls for oil producers to increase supply.

However, they blame the high prices on speculators and the weakening US dollar, which makes oil a more attractive investment.

No one seems to

Why are oil prices so high?

Economists will tell you that prices are set by supply and demand and, indeed, at the heart of the rise in oil prices are what are known as the fundamentals.

Demand for oil has been growing as Asia’s power-house economies such as China and India fuel their rapid economic expansion.

At the same time, there are all sorts of worries about the supply of oil.

A lot of the world’s oil comes from somewhat unstable countries, so every time oil workers are attacked in Nigeria or Iraqi oil facilities are damaged, people get concerned about the supply of oil.

So fundamentally, people are worried that demand may be growing faster than supply, and oil is such an important commodity that they are prepared to pay more and more for it if they are worried.

That all sounds pretty simple then

Well it would be if everybody had exact figures for the fundamentals that influence oil prices.

The problem is that nobody knows exactly how much oil there is in the ground, many producers are a bit cagey about admitting how much they have taken out and we do not know how much oil is in tankers being shipped around the world.

On top of that, we do not have reliable figures for how much oil most countries have squirreled away in case of emergencies or indeed exactly how much oil is being consumed.

So what determines prices is not the fundamentals but everybody’s perceptions of the fundamentals.

That means that when proper figures, such as the weekly US inventories figures, are released, undue weight is placed on them because few countries are so transparent.

But other than that it’s just like any other commodity?

Unfortunately not.

First of all there is the Organisation of Petroleum Exporting Countries (Opec), which controls 55% of the world’s oil exports.

The idea is that its members only raise or lower their production when all the other members do.

It does not always work, but it certainly means that oil is not a free market.

Also, there is a finite amount of oil in the world.

The oil that has been taken out of the ground first is the easiest, and therefore cheapest, to access.

As oil prices rise, it becomes financial viable to spend more to extract oil that is in trickier places to mine.

But as the available oil is depleted, the price will naturally rise because it is harder to find and more expensive to mine.

In addition, when there is talk about supply being threatened by unrest in the Middle East or storms in the Gulf of Mexico, how much of a problem these factors will actually be is generally a guess.

So is it unfair to blame the speculators?

The speculators certainly have a part to play in all this.

To an increasing extent, financial institutions are trading in oil as an investment like shares or currencies.

They buy oil contracts in the hope that their value will go up before they sell them.

Alternatively, if they think the price will fall, they may sell oil contracts they do not have and buy them later, in time to settle the deal.

Even those who believe that the market is based on fundamentals accept that the participation of speculators has created greater volatility in the market.

Factors that in the past might have moved the price by a few cents could now move it by more than a dollar.

It has also given sudden relevance to factors that in the past would not have moved oil prices at all.

What sort of factors?

Events such as rocket testing in North Korea have been cited as reasons for the rising price of oil.

But it is hard to imagine how it could have any direct effect on its supply or demand.

In a market with such a serious shortage of reliable information, as long as enough people believe that a factor will affect the oil price, it will.

And in some cases the effect of factors have been reversed.

How can that happen?

Up until less than a year ago, a weakening US dollar would have been seen as a sign of weakness in the US economy, which would have meant that demand for oil was likely to fall and so the oil price would fall.

But recently, many traders have believed that some people are treating oil and the dollar as alternative investments.

So, if they think the dollar is falling they will buy oil instead and if they think oil is falling they will buy dollars instead.

Because people believe this to be the case, a negative relationship has built up between the oil price and the dollar.

Whether people are actually treating the two as alternative investments is no longer important - what matters is that people believe that they do.

But a market based on so little concrete information and so much belief is vulnerable to people changing their minds.

source: www.forexoptical.com



BENJAMIN

Nelson asked:


I know gas was like $4 or higher when crude oil was over a hundred bucks a barrel. Now oil is down to $71 but gas is still just under 3 where i live. What was the price of oil on the stock market before Katrina when gas was around 1.50 or maybe a bit more?

FRANKIE

Mark d asked:


I have noticed that in todays economy, when there is a huge drop in the DOW, there is a also a drop in the price of oil. When the DOW goes up, so does the price of oil. How do these two elements relate to each other?

I personally think that the drop in oil is good, as we get gasoline cheaper. On the other hand, we need a stronger economy. The way I understand it is cheaper oil means lower operating costs of companies which means a stronger economy. But I dont understand why the drop in the DOW results in the drop in gas prices.

CHAS

Philladelphia asked:


Crude oil is the very foundation of our economy is it not.

ANTONIO

dabestofemall_09 asked:


Without proper planning, food shortages will pose a significant problem in a World Without Oil. What is the long-term prognosis for food production in your region? Are you concerned?
What solutions do you want to implement to counter the problems currently being faced in the oil crisis?

DAVE

Robin M. Mills asked:


The opening years of the 21st century are marked by milestones in the world of oil: the war in Iraq, the Shell reserves downgrade, Hurricane Katrina, and the breaking of the once unthinkable $100 per barrel barrier. Many have seized on these events as evidence that we are crossing the threshold of ‘peak oil’. Behind us, a century and a half of abundant, cheap oil that fuelled industrial civilization and brought unparalleled prosperity to a fortunate global minority. Ahead of us, permanent declines in oil production, scarce and unaffordable energy, wars over dwindling resources, disastrous climate change, perhaps the collapse of modern society. But these ideas are based on misconceptions, flawed reasoning, and excessive pessimism. The world has abundant oil and gas for decades to come, geopolitical conflicts can be avoided by adroit policies, and we can learn to use hydrocarbons without unacceptable environmental damage.

We have been here before. In 1865, the economist William Jevons warned that Britain’s global supremacy would shortly be ended by the exhaustion of its coal mines. The pioneering conservationist Gifford Pinchot wrote in 1910 that “our supplies of iron ore, mineral oil and natural gas are being rapidly depleted, and many of the great fields are already exhausted”. There were further predictions of imminent oil decline from industry geologists in 1885, 1919 and 1956, from Jimmy Carter in 1977, from the US government in 1980. A prominent ‘peak oiler’, Colin Campbell, claimed in 1989 that oil output had peaked; another, Kenneth Deffeyes, put the peak date, rather precisely, at December 16th 2005.

The current high prices certainly seem to give some credibility to the idea that we are approaching some fundamental limit of oil resources. But we should remember how we arrived at this situation, since the culprit is not constraints on oil in the ground: it is the long 1986-98 period of low prices and under-investment. Low prices decimated the oil industry, while the rise of energy-hungry new powers in Asia, combined with robust demand in the developed world and geopolitical upsets in major producers, stealthily ate up spare production capacity. The inevitable result, perhaps amplified by ‘speculation’ and market nervousness, has been a so-far inexorable rise in the oil price.

This price rise is not driven, then, primarily by geology. But many commentators outside the energy business, and some within it, believe high oil prices vindicate their often-repeated claims that ‘peak oil’ is imminent. Supporters of this view point to the work of the American geologist M. King Hubbert, whose seminal 1956 paper prophesied a peak in US output by 1965-1970 (the actual year was 1970), a success often taken to prove that oil depletion must follow ‘Hubbert’s Curve’. Yet when applied to other countries, ‘Hubbert’s Curve’ and its variants are at best approximately right, but frequently wildly wrong.

Predictions of the date of ‘peak oil’ require some estimate of the amount of oil reserves known today, and the quantity to be found in the future. Believers in imminent depletion state that global reserves, particularly in the OPEC countries, are heavily over-stated, that exploration success is falling well short of replacing production, and that technology does not unlock significant new oil. These assumptions imply that we are on the cusp of producing half of our ultimate total of oil. Hubbert’s method therefore predicts imminent decline.

Although a few countries may be over-estimating their reserves, comprehensive industry databases suggest that, if anything, the aggregate official figures are somewhat low. OPEC’s upgrades in the mid-1980s are mostly reasonable given prior conservatism, exploration success and advances in technology. Lack of recent exploration success is due to limited effort during the low-price era, and to restrictions on access to promising areas like major OPEC countries, Russia and the US offshore. In any case, huge recent discoveries in areas like deepwater Brazil confound the pessimists. ‘Reserves growth’ is a real and major phenomenon in many major oil regions, not an artefact of conservative reporting — the best place to look for new oil is in oil fields, with fresh ideas and methods.

‘Unconventional’ oil is becoming conventional, and making up a growing proportion of supply. Output from the famous ‘oil sands’ of Canada is growing rapidly; heavy oil all around the world is attracting new attention, from the UK to Russia to Saudi Arabia to Congo. Liquid fuels can be made from abundant coal and gas. ‘Second generation’ biofuels, from non-food crops, promise to overcome the problems of rising food prices, while the trillions of barrels in oil shales may be on the verge of being unlocked. And a wide swathe of oil demand can be substituted by abundant natural gas, which, even more than oil, is nowhere near ‘peak’, and which emits much less carbon dioxide.

Nor is geopolitics the insuperable threat it is made out to be. The abundance and geographic dispersal of unconventional oil and other energy sources renders a long-term oil embargo self-destructive. Nor is the Middle East rabidly hostile to the West and keen to wield the ‘oil weapon’, despite xenophobic claims. Modern ‘resource wars’ cannot pay for themselves, as the Iran-Iraq war and the recent Iraqconflict amply demonstrate. Terrorism is not capable of disrupting the long-term energy picture — as long as it does not provoke its victims into ill-conceived retaliation. The military, practical and political difficulties of blocking the ‘choke-points’ of international oil trade are widely under-estimated. ‘Energy independence’ cannot be attained at acceptable cost by any large consuming or producing nation. Retreats into paranoid self-sufficiency threaten a re-run of the grim 1930s; energy security can only be achieved, or at least improved, by a balance between the needs of exporters and importers, and a web of mutual inter-dependency.

Even the serious environmental problems associated with fossil fuel extraction and use, particularly some unconventional sources, can be tackled by new technologies, incentivised by policies to make the ‘polluter pay’. The environmental impact of modern oil extraction, even in sensitive areas such as offshore or in the Arctic, is much less than generally imagined. The very real threat of climate change requires a portfolio of solutions. A key one is ‘carbon sequestration’, the locking away of carbon dioxide in underground reservoirs, a method that can also liberate additional oil and gas. Despite claims to the contrary, all the components of carbon sequestration are proven; they need only to be put together on a large, repeatable scale.

Energy efficiency and renewable energy are key components of the fight against both climate change and the phantom of oil depletion. A growing economy and living standards would be possible even in the face of declining oil use. ‘Neo-Luddite’ calls for the end of industrial civilization are, if taken seriously, both naïve and apocalyptic. In this sense, oil will never ‘run out’; it will be replaced by something better. That is the best and most positive reply to Jevons’ fears about the ‘end of coal’, and to the modern peak oil movement.

©2008 Robin M. Mills

 



DAMIEN