Proposals to Rein in the Mounting Oil Prices
Walid Khadduri Al-Hayat - 13/01/08//
During the second half of 2007, oil prices fluctuated between $80 and $99 a barrel; these levels are higher than can be explained in economic terms by global supply of and demand for crude. The International Energy Agency (IEA) has on every possible occasion during this period called on OPEC to increase production as if this is the most efficient means to put a cap on these price increases.
The price of oil has actually broken the psychological barrier of $100 a barrel, having done so on the first day of trading in 2008, thanks to a speculator who wanted to become renowned as the person who pushed oil prices above $100. This speculator truly achieved his dream, but only for a short period of time, as the price fell below this level in recent days to hover around $94 a barrel.
What's interesting is that the International Energy Agency recently proposed other solutions to avoid this situation. In a statement on "High Oil Prices" issued from its Paris headquarters on 3 January, the IEA said the following:
"This week, short-term factors such as cold weather, falling inventory levels in the US and elsewhere, together with rising geopolitical tensions and the usual 1 January flow of investment fund money - especially into commodities this year against the backdrop of a weakening dollar - have edged us back to that milestone. $100/bbl may be just a symbolic figure but it is a strong reminder that consumers and governments have to implement measures that improve energy efficiency. Such measures are available now and provide the most effective short-term response. In the longer term, greater investment in the upstream and downstream sectors is needed. The resources are there, but access to resources, aging infrastructure and chronic new project delays and cost inflation mean it will take time to bring the oil to consumers. More broadly, consumer countries must also increase investment in alternative energy sources."
The importance of the statement lies in the fact that it does not hold OPEC responsible for the mounting oil prices, whether openly or directly. The only indirect reference to the reduction in output, in the opinion of the IEA, was the relative drop in the inventory levels in the US and other industrial countries. However, the IEA statement made no reference whatsoever to OPEC's role in the price rise. This is unprecedented, especially by the IEA. Of course, OPEC adopts a different viewpoint than the IEA member states with respect to the party responsible for the inventory level. OPEC states consider themselves responsible for ensuring that crude oil supplies meet the needs of consumption and not inventory.
However, more important than the issue of blame is that the IEA offered the following proposals to reduce prices: rationalize consumption, increase investment in energy, focus on the big role of investment and money flows into oil markets in the short term, and curb rising inflation rates. All of these are factors that OPEC ministers warn against.
What is the importance of the short statement by the IEA, which represents the interests of consuming industrialized countries?
Oil prices fell slightly last week despite the "provocations" by speedboats of the Iranian Revolutionary Guards against US warships in the Strait of Hormuz. Most analysts expected oil prices to soar upon such an incident taking place in this region. However, what prompted oil prices to spiral downwards and not upwards, as was expected in political crises of this sort, was that the "provocations" did not lead to an exchange of fire; there were also negative expectations about the future of the US economy, issued by the US Treasury, and figures indicating a rise in unemployment in the US, let alone the numerous statements and articles about the changing pattern of the US economy and the beginning of its entry into recession because of the banking crisis, which in turn has resulted from the subprime mortgage crisis and the gradual impact of these crises on the demand for oil.
*Dr. Walid Khadduri is an expert in energy affairs
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