Oil: Refuge for investors and speculators in times of inflation and a depreciation dollars
Walid Khadduri Al-Hayat - 09/03/08//
Oil prices hit record levels over $100 per barrel on every single day last week, which concurred with OPEC's ministerial conference in Vienna.
What is behind this rapid hike in prices? Why has OPEC decided not to increase production despite these unprecedented price increases?
Based on information issued by official sources in New York and Washington, it is now evident that the main cause behind this unusual rise in oil prices is the resort of investors and speculators to the commodities market to escape the effects of inflation and the depreciation of the dollar against other currencies.
These groups are now placing their bets on oil futures or "paper oil", buying volumes that expire in five years at $200 per barrel. This implies that prices may reach such a level despite the fact that neither oil-market nor economic fundamentals justify such a stunning increase in non-speculated prices and high profits
This explains OPEC's decision not to increase production and the rationale behind this decision. The organization is only responsible for supplying the markets with their crude oil needs and preventing shortages. On the other hand, dealing with futures does not only lie outside its realm but it also falls beyond its control, which justifies its current policy not to raise the production ceiling.
By deciding not to raise production levels in its meeting last week, OPEC's ministerial council did not endorse the American suggestion to increase production as proposed by President George Bush. At the same time, the council did not endorse Iran and Venezuela's proposition to cut production since this would have been difficult to justify when prices are above the $100 level.
The decision clearly reveals the decision making process within OPEC in recent years, namely dealing with economic and oil-related figures and information available for the ministers and the general secretariat of the organization instead of giving in to various political demands. The organization has also been successful in neutralizing or marginalizing political differences among member states, even when such differences are numerous and acute at present. This has allowed OPEC to focus on oil policy priorities that concern member states, namely attaining a reasonable price for crude oil. It must be acknowledged that the helping factor for the organization has been the unprecedented economic growth in the US and China, which contributed to high and sustainable increases in demand for oil over many consecutive years.
Yet, now that the direction of economic growth in the US has changed and may even be heading toward a recession as a result of the subprime crisis and its repercussions in different economic sectors, the organization is recalling the price catastrophe it encountered in 1998, when oil prices dropped to below $10 as a result of increasing production at the onset of the Asian economic crisis.
In an important interview with colleague Pierre Terzian, editor in chief of the Paris-based Petrostrategy Bulletin that specializes in energy, Saudi Oil Minister Ali al-Naimi stated that he did not expect oil prices to fall below $60 and added, "There is now a line below which prices will not fall", expecting prices to level between $60 and $70.
The statement and its underlying message to the markets imply that OPEC will adapt its production to defend the price level of $60 to $70. Moreover, major global oil companies are developing their new oil projects on the basis of a minimal price of $60.
However, it is also evident that this statement does not bind the organization to any specific price range. The organization has long adopted a flexible policy in which it abandoned commitments to specific price ranging, leaving price movement to international markets. This absolves OPEC and its member states of any responsible for prices, especially given the high levels they have recently reached.
The organization limits its responsibility to ensuring sufficient supplies of crude oil to the markets to prevent any shortages but at the same time, it also avoids any flooding or dumping in the markets. Anything else, however, is left to the markets and to the major advanced countries that allow their markets to engage in speculations that threaten their economies or the global economy. This is particularly true as the size and volume of speculations become significant as a result of the globalization of markets and the inability of exporting countries to influence the daily movements of the open market where the exchanged volumes exceed OPEC's entire production volume by many times.
* Energy Expert
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