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Russian oil drop may be inflating prices

Philip Andrews, The Post (Ireland)
The International Energy Agency has hinted that a 1 per cent drop in Russian output in the first quarter of 2008 is contributing to record oil prices. This is the first time in ten years that Russian production will have fallen.

Analysts say the fall may be anomalous, due simply to high taxes and inadequate reinvestment. Russia is the world’s second-biggest producer of crude oil and one of its main exporters, with reserves of about 40 billion tons, of which 25 billion are on its continental shelf.

… Many oilfields were originally drilled in the Soviet era and are now beginning to dry up. Ninety per cent of oil resources discovered over the last century have been fully exploited. Insufficient new wells are being drilled, due to investment and environmental risks, and infrastructure and climatic concerns.

Foreign oil companies like Shell and BP are reluctant to invest further in exploration and production in Russia after a serious of setbacks over the last few years.
(20 April 2008)

Against the grain: weak dollar hits the poor

Larry Elliott, Guardian
Concerted intervention to help the greenback would reverse soaring food prices

Against the backdrop of the gloomiest outlook for the global economy in many years, the price of oil hit $115 a barrel for the first time last week and the cost of wheat, rice and soya beans soared.

The first rule of economics – that prices are determined by demand and supply – appears to have broken down. When times are tough, commodity prices normally fall, but as the financial crisis has deepened over the past nine months they have been going up and up.

There are several explanations for this strange phenomenon. …
Peak oil

At best, however, these can only be partial explanations. The world may be close to peak oil (the highest point of production) and suggestions that two key producers, Nigeria and Russia, may have achieved maximum output add weight to that thesis. Yet even those who believe fervently in dwindling reserves of crude in the coming decades would struggle to argue that peak oil is the reason prices are five times higher than in 2002 and up from $70 to $115 in a year. Similarly, turning land used for food over to crops for biofuels may have something to do with the 120% increase in the cost of wheat and the 75% rise in the price of rice over the past year but, again, it is not the whole story.

Nor can those sorts of increases really be put down entirely to the China effect. One reason, for example, why the cost of milk and butter has been going up so strongly in Britain is that Chinese citizens have for the first time been able to afford refrigerators to store dairy products. But the sheer scale of the increases in food prices over the past 12 months would suggest that something else has been going on.

That “something else” is the precipitous decline in the value of the US dollar. Take a look at the accompanying charts, which show very strong correlations between commodity prices and the exchange rate for the greenback
(21 April 2008)

Why new oil price highs?

James Hamilton, Econbrowser
West Texas Intermediate closed today above $115/barrel. Does that reflect changes in the fundamentals of world supply and demand? My answer is no.

Let me acknowledge first that there has been some interesting news about world oil supplies. Nate Hagens noted that, although global oil production has stagnated over the last several years, the January 2008 data finally show a new all-time high in terms of the quantity produced worldwide.

Phil Hart had an informative graphic showing how the stagnant oil production for 2007 represented a balance in which gains in production in some countries were just about matched by lost production from others.

And there were some important additional new developments just this week. On the positive side, Brazil announced the possibility of enormous new oil reserves. And for the pessimists, Russian oil production, whose increase has been a critical factor in world oil supplies up to this point, fell 1% in 2008:Q1.

Both of these stories are potentially huge developments. If both Russian and Saudi production have in fact peaked, the global peak cannot be far off, even if the Brazilian find is borne out. But I nevertheless am not persuaded that any of these news items is the primary explanation for the recent highs in oil prices.

The reason is that we’re seeing similar increases since the start of the year in the price of virtually every storable commodity.
(17 April 2008)

Surge in Natural-Gas Price Stoked by New Global Trade

Ann Davis and Russell Gold, Wall Street Journal
The global appetite for natural gas has profound implications for a U.S. economy already tipping toward recession and struggling against inflation pressures. The fuel heats half of U.S. homes, generates 20% of the country’s electricity and is used to make everything from fertilizer to plastic bags. In March, rising natural-gas prices contributed to a higher than expected 1.1% increase in producer prices, according to the Labor Department.

U.S. natural-gas output has actually been rising in recent months, and not everyone agrees that prices are destined to surge. However, a significant number of financial players are now betting on an increase.

On Thursday a report by the Barclays Capital unit of Barclays PLC warned that, partly because of rising natural-gas prices, the U.S. could start to see spikes in electricity costs in as little as a year. “Power is at the cusp of its next boom cycle,” analysts said. “When power markets tighten, prices do not notch up, they skyrocket.”
(18 April 2008)
Contributor Dave Cohen writes:
With all the focus on oil, diesel and gasoline, we sometimes forget that natural gas prices have risen lately in lockstep with the oil price. This report on the growing LNG trade tells us that imported gas will not be cheap.