Reasons for Crude Oil Price Rises and the Repercussions
Arab media source
Walid Khadduri Al-Hayat - 04/11/07//
There are various and conflicting views regarding the reasons for the record and rapid rise in crude oil prices. Some experts attribute the developments to purely geological reasons, believing that the big oil states have reached the peak of their productive capacity and have no new reserves to exploit. Others attribute the developments to economic reasons, such as the sustainable growth in China and Iran, while still others point to the "hidden hands" of markets that are taking advantage of opportunities to reap astronomical financial benefits, such as the case of speculators, for example. There are those who attribute the increase in consumption demand, which involves the additional storage quantities required prior to a military confrontation between Iran and the West. Some oil observers attribute the reason for weekly fluctuations to the level of the US commercial reserve of crude oil. Of course, there is the problem of the delay in constructing new refineries in industrial countries. Finally, there has been increasing talk about the impact of the weak dollar on the rise in consumption, but without confirmed information, and the increase in demand for oil in Europe and Japan.
In fact, there are many reasons, and it is difficult to restrict the phenomenon of price rises to a single, fundamental one. Meanwhile, there are different viewpoints even with in the camp of producing and consuming countries, not to mention the huge differences in vision between the two groups, resulting from the disparate interests among them.
However, the truth is that this phenomenon cannot continue for a long period of time. The reason for this is not limited to the level of the recent increase in prices, during which US light crude hit $96 a barrel last week, but in the rapid frequency of these increases - day after day - without clear reasons for this, or without the appearance of new factors in the markets that bring about the appearance of daily increases.
Needless to say, these increases will have negative economic repercussions in many consumer states, especially in developing countries, since the burden on the balance of payments in these states will grow. Moreover, there are difficulties that the average citizen will face in using his car to move around and make a living. The rise in the price of gasoline, especially after the decision by many governments to raise taxes on this commodity, will increase the burden on family budgets.
This increase also comes at a time in which the US economy is facing a mortgage lending crisis. In the US, people have begun to talk about the possibility of a slowdown in economic growth.
Even if the issue is connected to the US domestic situation, one cannot ignore the repercussions of this slowdown for the world economy in general, such as the impact on interest rates and the value of the dollar. These repercussions will be reflected, sooner or later, on demand for oil, and thus on the economies of producing states themselves.
Also, we should not forget poor conditions experienced by producing countries after each sharp and severe rise in prices, followed by the repercussions of a drop that follows the increases, without seeing an expectation that we will return to the low levels that oil prices once reached, namely $10 a barrel. The experiences after the 1986 and 1998 price drops are absent from the minds of politicians and economists in our countries.
The probability of a reduction in economic growth in the US raises an important topic for OPEC. If the organization undertakes a substantial increase in production, at a time when an economic recession in the US is expected, this will lead to a price collapse and make it difficult to control the speed of the downturn. It also appears difficult to control the rate of the current rise, as we have learned from the experience of the Asian economic collapse of the 1990s.
However, at the same time, it's very difficult for OPEC to ignore the negative repercussions of the recent increases on the performance of the international economy or its own performance. The open acknowledgment by officials that matters are beyond the control of OPEC, which is unable to put a ceiling on these price jumps is, in one way or another, a recognition of the inability to limit daily price fluctuations.
One of the dangerous points during these critical times is the attempt to politicize decision making, or score political benefits by exploiting the oil price rise. This will rebound on those who think in such a manner, especially after the huge investments made by producing countries in high productive capacity, which comes to a halt when demand is reduced because of a price rise, and the negative repercussions the phenomenon has for the performance of the world economy. The important thing is to achieve stability in prices with gradual and reasonable rises that reflect international economic developments and the balance of supply and demand in markets.
As for today's price increases, these are due in the end to the factors of fear and anxiety that prevail in markets, with the possibility of an interruption in supplies from the Middle East in the foreseeable future.
The importance of the weekly figures about the US crude oil commercial reserve is a bit exaggerated. The official figures about the level of this reserve indicate it has risen to a billion barrels 1.104 billion, or an 18-million barrel increase on the average of the last five years. Of course, we are talking only about the commercial reserve and not the strategic reserve, which also stands at about 1 billion barrels. The difference between the two is that the commercial reserve is the responsibility of oil companies and is used to balance daily supply and demand in the US, while the strategic reserve is the responsibility of the federal government and its task is to compensate the US market in the event of an interruption in supplies. Since the US consumes around 22 million barrels a day, and produces 9 million, it imports 13 million barrels a day of crude oil and petroleum products (of which about 2.5 million barrels a day come from Arab countries). These figures show the huge scope of the total oil reserve available to the US and the long period of time the country could hold out, despite an interruption in supplies from the Gulf.
However, any possible interruption in supplies from the Gulf due to the outbreak of a military conflict between the US and Iran will affect the international oil market, despite the American oil reserves, since the market approximates the balance achieved in "connected vessels"; any important interruption in supplies will affect prices throughout the world.
After its last ministerial meeting in September in Vienna, OPEC announced that it would work to maintain a level of no more than $80 a barrel. It's clear now that matters are largely out of the organization's hands, and should be dealt with seriously in order to preserve OPEC's credibility and the health of the oil market and the world economy.
*Expert in energy affairs
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