Oil In A Week (The Impact of Record Oil Prices on Consumers and Producers)
Walid Khadduri Al-Hayat - 16/03/08//
Many are wondering these days about the maximum price level that may be reached by crude oil as it approached the $110 per barrel line.
Predictions vary with the sources of estimates; some expect a slight decline to the $90 dollar in the foreseeable future (which is a high price at any rate even if it is below the current prices) because of the declining economic growth in the US, western industrialized member nations at the Organization for Economic Cooperation and Development (OECD), not to mention the repercussions of rising prices. However, future oil prices (say in five years) stay at almost double the current levels, mainly because of fears over shortages in future supplies.
In 1989, Goldman Sachs, a financial institution, anticipated that oil prices would rise to $100. It now expects it to decline $90 by the end of next spring as speculators seek to collect profits before rising by the end of the year with the recovery of the American and Chinese economies.
In its last monthly report on global markets, the International Energy Agency (IEA) expected a drop in demand of about 80,000 barrels daily in 2008 as a result declining economic growth in western industrialized countries against a rise in demand in the former Soviet Union countries. However, the report did not specify the expected price range in the short term.
Regardless of the variation in expectations and opinions, what matters more is that all analysts seem to agree that the primary factor driving oil prices to such record levels these days is the depreciating dollar, not to mention the inflation and speculation. All this makes oil and other commodities such as gold and even cocoa and coal a safe haven for investors and speculators. In other words, the link between oil prices and the fundamentals of demand and supply in international markets is broken for now which in turn marginalizes OPEC's role and temporary neutralizes the role of the organization until the market returns to normal dynamics.
Ultimately, the rising prices of primary goods, along with the depreciating dollar, are having a rapidly worsening effect on living standards and consumption in dollars relying on the US dollar. As the complaints and protests of citizens regarding this situation increase, their governments stand helpless as they can do nothing to face the difficult circumstances instigated by high inflation. In such circumstances, government subsidies to primary goods can be of very limited use. For example, the price of wheat and eventually the price of bread have recently almost doubled. In terms of figures, a country such as the US which is the largest oil consumer on the global level, the cost of oil imports has increased by almost 300% since prices started to rise in 2002, reaching $327 billion last year. It is estimated to reach almost $400 billion in 2008. Among the consequences of this heavy cost of oil is weakening the dollar although a weaker dollar also leads to increasing American exports.
The same case applies to oil-producing countries, especially with respect to their strategic oil projects under construction. On a daily basis, news reports indicate not only delays in some of these projects but also costs rising in billions of dollars. A project that cost about four billion dollar a year ago now costs between $12 and $14 billion. Many similar examples like can now be seen in oil-producing nations. It is noticeable that these increases in costs come at a time when these nations are trying to increase their crude oil or natural gas production capacity, their refining capacity, or the size of their petrochemical industries. The delay in increasing production capacity, specifically at present, represents the loss of huge revenues given the current prices.
* Dr. Khadduri is an expert in energy matters
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