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How high can the price of a barrel of crude go?
Jeffrey Bartholet, Newsweek (web-only)
The last time oil prices were this high was more than a quarter-century ago. Then, too, the Middle East was aflame.
… On Monday the price of a barrel of oil briefly topped $99.04-a level last reached in April 1980 (after factoring in inflation), according to Cambridge Energy Research Associates. How high can oil prices go, and what impact will they have? James Burkhard is managing director of the Global Oil Group at CERA, a private company that advises governments and corporations on energy trends. He spoke to NEWSWEEK’s Jeffrey Bartholet. Excerpts:
Q: Oil prices are flirting with $100 a barrel. Do you expect them to continue rising?
James Burkhard: As long as anxiety about the reliability of supply remains strong, prices will rise. They are going to be volatile, with significant upward pressure.
Q: Why are analysts worried about supply?
Burkhard: Let me boil it down to one thing: what is behind this price rise is the perception that supply will not be able to keep up with rising demand. And the reason we have that perception has several facets. One is geopolitical tensions: concerns about the nuclear issue with Iran. One is the high-cost environment, meaning it’s much more expensive to develop oil fields today than it was just five years ago. And there’s great demand for people who can develop oil fields, so there’s a shortage of qualified personnel.
… Q: Where do you stand on the question of peak oil: that we’re on a slope of dwindling resources?
Burkhard: We believe there is plenty of below-ground resources to satisfy demand …
Q: For how long?
Burkhard: We have an outlook that goes to 2030, so we don’t see a peak in the supply. But what’s really important is, will investment be allowed to go to areas that can move supply? If investment is not allowed to go there, we could have very tight oil supply … Venezuela has significantly altered its investment climate, so investments there are not as attractive as they used to be. Mexico does not allow foreign investment [in the oil sector].
(27 November 2007)
Seems like good information, except when Mr. Burkhard repeats the CERA line on peak oil. -BA
$100 oil and the ‘S’ word
Steve Hargreaves, CNNMoney
Is it growing demand and tight supply, or merely rampant speculation that has pushed crude to record highs?
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Greed is driving oil prices to $100 a barrel.
That’s a common feeling among the general public, which sees record profits for investment banks that bet on oil prices – making wealthy oil companies even wealthier – while drivers shell out $3 and more for a gallon of gas.
It’s also a common refrain from OPEC states. Having to defend themselves against charges their production quotas are responsible for the high prices, they point to near-average crude oil supplies and say speculation is what’s behind the frenzy.
But industry experts offer mixed opinions on speculative investment’s impact on oil prices. Some say it’s marginal, that strong demand and limited supply are the real reasons oil prices have risen five-fold since 2002, and say additional investors actually benefit the market by adding more liquidity.
Others say the tight supply and demand situation has been known for a while, and nothing but speculation is behind the doubling of oil prices over the last year. They say there is a cost to the sheer number of oil contracts now traded on the oil exchanges, and this trading has just enriched Wall Streeters at the expense of average Americans.
The Energy Information Administration, the Energy Department’s independent statistical and analysis arm, thinks strong demand and limited supply – otherwise knows as “the fundamentals” – is why oil is so pricey.
(27 November 2007)
Seven Questions: The Price of Fear
Foreign Policy
Something funny has happened to the price of oil: It no longer reflects reality. The reason, according to Fadel Gheit, one of Wall Street’s top energy analysts, is that “financial players have seized control of the oil markets”. Find out how they did it in this week’s Seven Questions.
Foreign Policy: The price of oil has come close to reaching $100 recently. What does that $100 figure mean?
Fadel Gheith: It’s a psychological number. I mean, what’s the difference between $100 oil and $99 oil? There are a lot of futures contracts tied to hitting this number of 100, but it’s only another number; it really doesn’t mean much.
FP: The International Energy Agency is now saying that it’s really growing demand from China and India, not tight supply, that is driving these high oil prices. What do you make of that argument?
FG: Well, that is also true, but does it change the equation so much that we see oil prices up 60 percent in less than six months? Obviously not. I’ve been in this business for 30 years, and I can tell you, I try to justify $60 oil and I can’t find any plausible reason to think that oil prices should be a dollar above $60, let alone above $90 or $100.
FP: So what about derivatives trading-
FG: That’s exactly what I’m focusing on. I truly believe that major investment banks and a large number of very high-risk-taking financial players have seized control of the oil markets, especially in the last six months. During that time, oil prices moved in one direction and market fundamentals really moved sideways or even lowered. Demand has slowed down significantly. We have seen all kinds of indications that we are reaching a breaking point here. We’ve seen what happened to gasoline margins on the West Coast; they’ve dropped to an almost 18-year low. All this is an indication that something is wrong with the system, that supply and demand fundamentals do not justify the current price. But if the current price is based on speculation, there is no limit to how high oil prices can go. Basically, as long as there is somebody willing to bid higher, the price of the commodity will move higher.
…FP: So, in other words, our own fear is driving up the price of oil?
FG: Well, if you are a commodity trader, you want to do your best to push the commodity price in the direction that you forecast. And obviously, when you have a lot of financial players making bets on much higher oil prices, they would like to see a self-fulfilling prophecy. They want to see oil prices reach the level that they put the bet on. So, they can spread rumors. And if the glass is half empty or half full, they will say it’s empty.
To my knowledge, there is no oil shortage. Any willing buyers will not have a problem finding oil.
(November 2007)
Speculators – another scapegoat to add to the usual list (OPEC, environmental regulation, oil companies). Actually, Mr. Gheith is not really arguing against speculation. All investment decisions are based to some degree on one’s outlook for the future. What he objects to is that the market seems to have a more pessimistic outlook than he thinks is justified. -BA
