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Why oil costs over $120 per barrel
Euan Mearns, The Oil Drum: Europe
With oil reaching $135 / barrel, Oil Drum readership exceeding 30,000 unique visitors per day and many wild stories circulating in the MSM as to why oil prices are so high this post strives to explain why oil prices are rising exponentially.
… In summary these secondary factors touted by the MSM, politicians and oil companies are nothing more than an excuse and a distraction from the core problem which is demand growth running ahead of supply growth for over three years now. If the USA, Russia or Saudi Arabia could turn on the taps and produce an additional 3 mmbpd, the oil price would fall tomorrow. But they can’t and the only way the oil price will come down is by reduced demand brought about by pricing poor people out of the energy market and by deepening recession.
Conclusion
We are now in the early stages of a full blown energy crisis that was predictable if not wholly avoidable. Politicians are awaking to the crisis now that escalating energy costs make its existence plain to see. It is highly unlikely that politicians will now grasp the gravity of the situation that the OECD and rest of the world faces and the responses will likely be ineffectual and too little too late.
The principal reason for current high oil price is the proximity of a peak in global oil production. Politicians must understand this and then grasp that natural gas and coal supplies will follow oil down by mid century. Reducing taxes on energy consumption right now is the wrong thing to do. Taxation structure needs to be adjusted to oblige energy producing companies to re-invest wind fall profits in alternative energy sources on a truly massive scale.
Energy efficiency should be the guiding beacon of all policy decisions and this must apply equally to energy production and energy consumption.
(28 May 2008)
What’s Really Driving the High Price of Oil?
Ralph Nader, Counter Punch
What factors are causing the zooming price of crude oil, gasoline and heating products? What is going to be done about it?
Don’t rely on the White House-with Bush and Cheney marinated in oil-or the Congress-which has hearings that grill oil executives who know that nothing is going to happen on Capitol Hill either.
Last week the price of crude oil reached about $130 a barrel after spiking to $140 briefly. The immediate cause? Guesses by oil man T. Boone Pickens and Goldman Sachs that the price could go to $150 and $200 a barrel respectivly in the near future. They were referring to what can be called the hoopla pricing party on the New York Mercantile Exchange. (NYMEX)
Meanwhile, consumers, workers and small businesses are suffering with the price of gasoline at $4 a gallon and diesel at $4.50 a gallon. Suffering but not protesting, except for a few demonstrations by independent truckers.
A consumer and small business revolt could be politically powerful. But what would they revolt to achieve? Their government is paralyzed and is unable to indicate any action if oil goes up to $200 or $400 a barrel. Washington, D.C. is leaving people defenseless and drawing no marker for when it will take action.
Oil was at $50 a barrel in January 2007, then $75 a barrel in August 2007. Now at $130 or so a barrel, it is clear that oil pricing is speculative activity, having very little to do with physical supply and demand. An essential product-petroleum-is set by speculators operating on rumor, greed, and fear of wild predictions.
… a sane government would see the present price crises as an opportunity to expand our passenger and freight railroad capacity and technology.
A sane government would drop all subsidies and tax loopholes for Big Oil’s huge profits and other fossil fuels and promote a national mission to solarize our economy to achieve major savings from energy conservation technology, retrofitting buildings, and upgrading efficiency standards for motor vehicles, home appliances, industrial engines and electric generating plants.
Ralph Nader is running for president as an independent.
(28 May 2008)
The search for scapegoats is not confined to the political Right. We need a better analysis of oil prices than “I’m mad as hell, and not going to take it anymore.” Still, Nader’s long-term suggestions make sense. -BA
What’s Behind the Flare-ups in Oil Prices?
Jeremy Siegel and Witold Henisz Weigh In (video and transcript)
Knowledge@Wharton (The Wharton School)
… What’s behind these regular flare-ups in oil prices? What are the major economic and geopolitical factors at work? How does expensive oil affect the U.S. and world markets, and what can we expect over the coming months? Knowledge@Wharton discussed these questions and more with finance professor Jeremy Siegel, author of The Future for Investors, and management professor Witold Henisz.
… Knowledge@Wharton: Right. I saw that George Soros, the billionaire investor, was interviewed by one of the British papers over the weekend. He said that speculation was primarily responsible for the further rise in oil prices. But it sounds like you don’t necessarily agree?
Siegel: There’s a fine line between speculation and buying for an even more expensive future. I think that people realize how important it is to hold some oil producing assets in their portfolio. If everyone thinks like that — that will go up. It’s not just speculators … moving that up. This is a scarce resource that the world is using more and more rapidly. Peak oil is always in the air and I think that is generating the increases.
Henisz: If you look at the probability that one country could go offline, driving a substantial increase in price is something that people are trading on the probability of. Is that speculation or is that hedging? When Southwest Airlines hedges their future oil supply, they are lauded as being smart relative to the rest of the airline industry. That’s not speculation, that’s hedging.
Knowledge@Wharton: Many of the media reports seem to make a connection between the weak dollar and the rise in the price of oil. Again, could you help explain what the connection might be?
Siegel: It’s more than just the dollar going down because even if you measure it in euros, which has been one of the strongest currencies, they have had a huge increase recently.
(28 May 2008)
Why gas is so expensive
Andrew Leonard, Salon
It’s not runaway greed or overregulation. It’s the world we live in. It’s a price that can be seen in a single gallon of California gas.
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… On Tuesday gas prices hit record highs in the United States for the 21st day in a row. Many Americans are understandably upset and angry. Partisans on both sides of the political aisle believe they know why this is happening. The left blames greedy, customer-gouging oil companies; the right pillories environmentalists for blocking the construction of new refineries, preventing offshore oil development and opposing drilling in the Arctic National Wildlife Refuge.
But there’s much more going on here than good old greed or restrictive environmental regulations. Explaining the high price of gasoline at my local pump requires taking into account surging demand for oil in China and India, the falling value of the dollar, the impact of commodity price speculation by energy traders and a whole constellation of factors exerting steady downward pressure on supply. Those include the Iraq war, political instability in Nigeria and anti-American intransigence in Venezuela and Iran. There’s also the ever-popular peak oil thesis: As the production of existing oil fields in Russia, Mexico, the North Sea and possibly Saudi Arabia inexorably declines, discovery and exploitation of new sources of oil are becoming steadily harder and more expensive.
Even the people who have spent their entire lives studying the price of oil don’t know for sure how to weigh each factor for responsibility in the total equation. Perhaps the safest thing to say is that it’s all in therein my $65 receipt. Kidnappings of oil executives in Nigeria and the nationalization of Exxon-operated facilities in Venezuela. Chinese economic growth and hedge fund manipulation. ANWR and air quality. The price of gas in the United States is a consequence of global economic growth, rising standards of living, greed, politics and the stresses induced by 6.5 billion people going about their business on a planet with limited resources.
Sound complicated? It most certainly is, which is one reason why we should avoid the temptation to simply blame greedy oil companies or radical environmentalists. But it’s also strangely simple — the world, and its manifold dilemmas, can be seen in a single gallon of California gas. Let’s take a closer look.
(28 May 2008)
Just added.
