The rise and fall of global oil prices

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The rise and fall of global oil prices

Post by Fida wal muqawamah on Sun Aug 10, 2008 6:22 pm

The rise and fall of global oil prices
Sat, 09 Aug 2008 16:21:13 GMT
By Abdolreza Ghofrani
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Reportedly, OPEC crude prices, over the past three months, for the first time have fallen to less than US$120 p/b. A few days ago, OPEC Secretary-General predicted that prices might dive much more and would even drop to US$70 or US$80 p/b. The fall of oil prices, he added, might in part be the result of the probable resolving of Iran's nuclear issue, and the return of peace and stability to the Middle East.

The history of oil has proven that hydrocarbon, oil price and oil market fluctuations have always been subject to several factors that need to be considered in all markets and price analyses.

Everyone is well aware that in addition to being an important natural material, oil, as far as its prices are concerned, is a highly sensitive commodity.

Political, economic, social, and environmental developments as well as natural disasters are among the key factors to which oil prices have always shown sensitivity.

To prove this point one need only to look at some of the recent world developments. US Democratic Presidential candidate Barack Obama in one of his campaign speeches reaffirmed the need of independent US energy policy and said to achieve that goal, the United States must rely on her own resources more. He suggested that the US use its own strategic oil resources that amount to as much as 700 million barrels. This kind of expression and its implications cannot be ignored.

In order to explain the causes of oil market fluctuations we need to address several political and economic dynamisms.

The economic dimension of this development is important and deserves far more attention. There has been, so far, a traditional vision for the crude price drop: Recession in advanced economies. It is an undeniable fact that the energy price has a key role in advanced economies.

Usually after an oil price hike (so-called oil shock in Western oil circles) an economic slowdown is expected in such economies. However, one does not need to take it for granted that it is the only non-political factor.

Naturally, the higher crude prices have always pushed down the demand and eventually oil prices drop. In present circumstances, other factors need to be accounted for price fluctuations. Monetary policies now must be added to the list of dynamisms affecting the crude prices. Through the past couple of months US $ devaluation has also had a deep impact on oil prices hikes. So the alleged tightness of oil supply was false and it was not the real shortage of oil supply but has been due to US monetary policies.

Some political and economic variables affecting the recent fall of oil prices and consumption can be listed as follows:

-There are still three moths until the US elections and until the new president is elected, it is difficult to predict the policies which he will pursue in political and economic contexts. However, it is expected that the new president will hopefully work toward global stability and peace at least in the beginning of his term.

-The probable use of strategic oil reserves particularly by the United States, as already mentioned, and which has been suggested by the Democrat presumptive nominee.

-The situation in the Middle East, and the outcome of ongoing peace negotiations.

- Global economic and production is slowing down and many big companies are downsizing.

- A number of airlines have reduced their services; leading to the slowdown of the global tourism industry and the reduction of air travel and energy consumption which has contributed to a drop in oil demand.

- Over the past year the rapid oil price spiraling has resulted in the manufacturing of smaller and more economy and energy efficient vehicles, as well as the use of alternative energies and particularly Ethanol, although this has driven the global food crisis.

- China has spent an extreme amount of money on the 2008 Beijing Olympic Games and when the games are over millions of tones of materials including steel used for this event will arrive in world markets.

-Both political and economic factors will influence governments and people, driving them to a special social behavior; in other words, when people have a promising future in sight, they raise their consumption; but in the time of despair and concern for the future, they quickly tighten their belts.

The” Black Gold” is an extremely sensitive commodity that shows a quick response to any event. Thus, the abovementioned developments can be determinant dynamics for oil price falls.

It is noteworthy that the recent action, taken by some OPEC members, was aimed at fixing the confused oil markets. Over the past three months OPEC has reportedly increased its output by 550 thousand barrels per day, thus the organization production ceiling has gone up from 32/33 million b/d in June to 32/58 m b/d in July.

The OPEC decision was made at a time when there was no market supply shortage, and when not only producing countries but also some western oil experts had bluntly declared that there is a “glut” in the oil markets.

Now those who held producing countries responsible for the shortness of supply claimed that this raise of production is one the factors that have pushed down prices.

We should not lose sight of the fact that OPEC's share of global oil production (80 million b/d) is only a little over 30 million barrels, namely one third of the world's supply. Certainly, a simple calculation can easily prove that although 550 thousand b/d production (nearly half a percent of the world's supply) may have a minor impact on the market, it will definitely not push down prices 20 or 30 US$ overnight.

Regardless of the above-mentioned factors, a candid observer, who follows up on global developments, may have this doubt in mind that in this situation oil prices should keep moving up not down, because of global inflations, the sky-rocketing prices of all goods and services, crises and wars in the four corners of the world, natural disasters, the temporary exit of refineries from the production networks as well as the walkouts and riots in establishments affiliated to oil industries, oil and gas leaks from some pipelines, the possibility of Iran closing the strategic Strait of Hormuz and finally the upcoming winter.

This contradiction is interesting because it shows the ambiguity of the reasons for the fluctuation of oil prices.

Therefore, given the international developments and the global economic realities, the repetition of the free fall of oil prices, as the world experienced in 1980 and 1990 if not impossible seems dubious in the future. As repeatedly considered, one reason is the rising demand for energy and the other is the depletion of energy carriers and in particular oil. Undoubtedly, the development of other energy resources is very critical.

Now the time has come for either producers or consumers, to embrace the stability of oil markets. One important point that deserves to be highlighted is that only the cooperation on the part of both sides can resolve the future problems that this depleting material may give raise to.

Everything is possible in the oil market and is subject to the aforementioned dynamisms as well as international developments and economic dynamics in the months to come. However, if the stability of oil prices is reasonable based on the global economic infrastructure, it can contribute to world production and economy and bring economic prosperity to confused global markets.

The author is a senior international and economic expert

Fida wal muqawamah
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