Oil in a Week (Demand for Oil Stable Despite Massive Price Hike)
Walid Khadduri Al-Hayat - 12/05/08//
Crude oil registered a record price last week, as if breaking price records has become a regular weekly event recently. The cause of the price hike last week was the continued depreciation of the US dollar and the attacks on Shell and Exxon's oil plants in Nigeria which obstructed both company's production in Africa's largest oil producer.
Oil prices exceeded $123 per barrel last week, and research centers at major financial institutions anticipated prices to reach $150 to $200 this year, thus reiterating the recent expectations of a few OPEC ministers. Indeed, the price of American crude oil has increased by about 94 percent over the past year, and from $102 at the beginning of April to almost $120 at the end of the month.
President George Bush has also joined the league of those expecting oil prices to continue rising or who at least acknowledge that they cannot put a cap to this rise. He recently said at a state conference that he wished he had a magic wand to put an end to this increase in oil prices, but he acknowledged at the same time that he does not possess such a magical wand before regretting not having the ability to end this increase in oil prices which is accompanied by an increase in the international prices of food products and which in turn leads to a state of inflation unseen by the international economy in many years.
A variety of opinions have been given on these economic developments. A few have attributed the rise in oil prices to the weakness of the US dollar against other currencies, and these have argued for a direct relationship between the dollar's appreciation on the one hand and the decline in oil prices on the other. Another explanation that is hard to ignore is the fact that the level of global demand for oil has remained virtually unchanged despite economic contraction in the US and its negative repercussions on the global economy as well as the daily increase in prices. According to traditional economic theory, when supply remains unchanged despite the emergence of these two factors, this is supposed to lead to a decline in oil demand.
The latest official American statistics indicates that the US consumption of fuel in 2007 has maintained the same level of 2006, namely 20.7 million barrels per day. So was the case for the consumption of vehicle fuel at 9.4 million barrels per day in 2006 and 2007. To make matters worse on the global level, the size of loans that banks and financial institutions could offer to new oil projects that aim at the rapid expansion of production or refinery capacity has diminished. This hesitation in providing the necessary funding for new projects is the result of the estimated one trillion dollar loss that has plagued the global financial sector as a result of the US subprime mortgage crisis and the involvement of many banks in this massive loss which could in turn lead to a global banking crisis.
What are the consequences of global inflation and the rapid and record hikes in oil prices?
The first of these consequences are the demonstrations seen on a daily basis in Lebanon, Egypt, Myanmar and Haiti, and which are triggered by inflation and then used by certain sides for purely domestic political causes. In the past, the governments of a few developing countries were able to subsidize fuel prices but given the price hikes and the pressures on public budgets, it is now difficult for a few states to continue their subsidies at the same previous rates and levels.
In the United States which consumes a quarter of the global oil supply, the price hike has become a top priority in the presidential campaigns as the candidates compete against one another in proposing solutions to bring this wave to an end. A few called for wider use of bio-fuel extracted from plants despite the growing knowledge of its environmental harm and economic costs such as the increase in the prices of flour and meats.
Yet, it is evident at the same time that the continued increase in crude oil prices will lead to a bigger share for alternative energies in the global energy market at the expense of the share of oil. While it is unlikely that these alternatives may pose a risk to the oil market in the foreseeable future, they can be strong competitors to it in specific sectors.
The danger lurks when the demand for oil does not shrink as a result of economic crises and rapid increase in prices. Consequently, the price hike is expected to persist as long as things remain as they are. This is a unique global economic state that has rarely been witnessed before. Of course there are other causes for the increase in oil prices such as the occupation of Iraq, the probability of a devastating military struggle in al-Basra province, not to mention the debate ongoing for two years now in the US about the possibility of a military strike against Iran and the repercussions of such an attack on the supplies of crude oil from the Gulf countries.
What are the responsibilities of oil-producing countries in such situations? First, the responsibility of OPEC states to bring an end to this abnormal rise in prices must be acknowledged, but so should the case be for the responsibility of industrial countries to reduce consumption in light of the severe economic variables. However, the problem facing OPEC countries is that they are not responsible for setting the prices of oil nowadays. This is the responsibility of the markets.
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