Yesterday oil hit $107 a barrel. Analysts and assorted crystal ball gazers have their own ideas about the reasons for the record highs. Rocketing demand in China and India, the limited capacity of US refineries or fears about production in Nigeria — or Angola — or Iraq — or some other oil-producing state. The most tenuous of arguments is used to justify and explain the seemingly inexorable rise. Last week, it was tension between Venezuela and Colombia and the US Labor Department’s report that 63,000 American jobs were lost in February. The former, it was construed, might affect Venezuela’s exports while the latter would add pressure for more US interest rate cuts which would then further weaken the dollar and result in investors turning even more to oil as a safe haven.
It is all speculation — based on yet more speculation. No one, for example, knows what the medium- to long-term Chinese demand is. In fact, not even the Chinese know. They are quite candid about it — although they have also said that in the short-term, demand is well within the producers’ capacity to supply.
It is not the market that is forcing prices up; it is dealers and speculators. No one can be left in any doubt about that after last week’s OPEC meeting. Despite international pressure to increase production (so as to bring down prices), the organization refused on the grounds that there is no demand for extra oil. The market continues to be well supplied, it says. Indeed OPEC thinks that demand will decline because of the economic slowdown in the US and a global decrease in requirements. The speculators were not listening. Within a day of the OPEC meeting, the price rose to the new high of $106.
Oil at this price is not good for producers. It makes investment into less accessible oil deposits more viable, thus increasing global supply, while at the same time it encourages consumers to cut consumption.
That is already happening. Faced with rising pump prices, Americans now pool cars going to work, question whether a particular journey is necessary, or are spurred to buy hybrid cars. And it is not just Americans who are going to buy hybrid: Anyone who thinks the Chinese and the Indians are going to stick with expensive all-petrol vehicles needs to have their heads examined.
Put everything together and what we see is supply outstripping demand.
Whether it is the Saudi stock market, the US media adoration of Barack Obama, or property prices in the US, bubbles eventually burst. The same is bound to happen to oil prices at some point. Based as they are at present on nothing more substantial than speculation, it is inevitable that they will fall when reality hits home. Oil at $70 to $80 a barrel is a more realistic scenario (but still excellent news for the Saudi economy with this year’s massive budget based on an assumed price of $50 a barrel). Sooner or later, market forces will return to center stage. When they do — and from what OPEC is saying about current demand it could be sooner rather than later — it will surely mean burned fingers for investors who bet on present sky-high prices.
