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We now go to why crude oil prices are rising. They have hit $135 per
barrel and apparently will scale $150 by yearend and $200 by next
year, before correcting by 2010 because oil at $250 will trigger a
massive lifestyle change that will cause a decline in oil
consumption.
The main reason for the recent rise it seems is
speculation. There is widespread belief that crude oil supplies,
while adequate at the moment, won’t be enough for the future.
There are several reasons for this. One is, it
is getting costlier to find and develop oil fields. Huge oil
reserves are located in countries which are troubled politically and
economically or countries which do not allow the entry of foreign
investors to find and develop these reserves.
Take the case of big oil exporters such as
Russia, Mexico and Venezuela. Their output is declining. Yet none of
them allows foreign investors free access to new fields or freedom
to increase production from existing ones.
Many promising areas for exploration, including
Saudi Arabia, Iraq and Iran, are off-limits to foreign oil firms.
Also, the cost of developing new fields is rising almost as fast as
the oil price or double since the year 2000.
A second reason is the huge appetite for crude
oil by China and India, two of the world’s fastest growing
economies. In 20 years, they will dominate the world, economically.
But first, they must develop themselves or industrialize. To do
that, they must consume tons and tons of oil.
On May 22, 2008, a US government report on lower
crude-oil inventories and a further decline in the dollar sent crude
prices to a record $135 a barrel.
The continued rise in crude prices, analysts
say, is being caused largely by rising world demand for diesel fuel.
China is said to be stockpiling fuel in
anticipation of additional transportation and electrical power needs
during the Summer Olympics and also is experiencing an
earthquake-related surge in the need for diesel.
A third factor for rising oil prices is the
massive shift of investment dollars into commodities such as
precious metals, grains and petroleum, which are a hedge against the
declining dollar.
US Sen. Joe Lieberman estimates that the value
of investment funds tracking oil and other raw materials has risen
from $13 billion to $260 billion in the past five years. He calls
these funds “index speculators.”
Actually, index funds do not carry oil
inventories which are bulky and expensive. They simply buy and sell
contracts for a future delivery. When delivery date approaches, they
sell the contract to someone who actually needs and uses the oil. In
this context, they become big sellers of oil for immediate delivery.
Hence, you can say there is no hoarding, an important element in
speculation.
A fourth factor is the weak US dollar.
Crude is priced in dollars. The more the dollar
slumps, the more attractive dollar-denominated oil contracts are to
foreign investors—or any investor looking for a safe haven in the
turbulent stock market.
In the US, gasoline price should not go up.
Supply is up and consumption is down.
But oil traders were focusing on other figures -
a decline of more than five million barrels in US crude oil
inventories last week from a week earlier, to 320.4 million, and a
decline from a week earlier in gasoline inventories. Analysts had
been expecting increases in both numbers.
The decline in gasoline supplies from a week
earlier signals a shift by refiners from production of gasoline to
diesel, which, because of growing demand, carries higher profits.
Barring an unforeseen burst in the petroleum
investment bubble, prices for both crude oil and finished fuels seem
headed still higher, unless the demand for diesel is tempered.
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