Summary:
Three years ago, when oil reached $50, economist's were already saying that price was too high. Today, oil costs two-and-a-half times as much. An analysis of what has happened. Factors considered are: inflation, dollar exchange rate, institutional investors, supply and demand, OPEC, refining capacity, alternatives. (published: 10/05/2008)
Notes:
- inflation
- after correction for inflation, the price of oil only recently exceeded that of April 1980
- dollar
- oil is paid in dollars
- dollar has dropped 14% against the euro in last 12 months
- price of oil for non-American buyers not as high as for Americans
- institutional investors
- eg pension and insurance funds
- hedging themselves against inflation, declining US interest rates and falling US dollar by investing in commodities, including oil
- a strategy that has been successful in the last couple of decades
- drives up price of oil
- demand side
- industry has become far more energy efficient since oil crisis in the seventies
- has slowed down increase in price of oil for a long time
- no longer possible to reduce consumption at the same rate (already near maximum efficiency)
- new growth markets: eg China; huge increase in demand for oil
- against expectations, Americans still not changing oil consumption patterns
- political promises to lower tax on oil contributing to this
- supply side
- difference between supply and demand too small
- supply still greater than demand, but difference is becoming smaller
- difference now so small that least disruption is driving prices up rapidly
- most known oil reserves depleted or past maximum capacity
- no significant new discoveries
- despite oil firms trying hard to discover new reserves in order to keep total oil production constan
- new wells increasingly difficult to exploit
- eg. oil from desert: $10/barrel; oil from North Sea: $25/barrel (up from $15, 3 years ago)
- increased demand for oil platform and personnel also driving prices up
- OPEC
- Secretary-general of OPEC (Abdalla Salem El-Badri) thinks current level of production is high enough
- Iraq: trying to pump up production again, but plagued by attacks
- Iran: not a reliable producer in eyes of West; oil as political weapon
- Nigeria: 8th largest producer; supply has dropped by 564,000 barrels a day since February due to attacks on installations
- refining capacity
- one thing to dig up oil, another to refine it to petrol, heating oil, diesel, kerosine, etc.
- underinvestment in refining capacity in the US
- solution: oil refined in Europe, then shipped to US
- very expensive solution for Americans
- labour more expensive than in US
- exacerbated by very weak dollar
- alternatives
- no alternatives in the near future
