Oil Prices at $70-80 a Barrel
Walid Khadduri Al-Hayat - 30/07/07//
The price of North Sea Brent has risen from $50 a barrel at the beginning of the year and recently crossed the record price threshold that was set last summer, during the Israeli war against Lebanon, namely $78 a barrel. It began to approach, for the first time, the level of $80, then fell to around $70.
What is behind this high level of prices?
First, there is the sustainable economic development in developing countries, such as China, and the big increase in demand for oil and oil imports, after China was an oil exporter at the beginning of the decade. It's interesting to note that China has recently become the second biggest consumer of oil (more than 6 million barrels a day), after the US and ahead of Japan.
Second is a chronic lack of refineries in industrial countries, since they have not built sufficient refining capacity to meet the increased demand, along with the precise specifications to meet environmental-improvement requirements. This applies in particular to the US.
Third, the oil price increase in the last three years has not affected consumption patterns and levels. Despite the big increase, international energy consumption has remained steady, and has even risen on some occasions, due to the rise in the standard of living in many countries, and the increasing reliance on consumer goods that use energy.
Fourth, OPEC has constantly and closely followed market movements and has sought to avoid a repeat of earlier experiences of supplying markets with more crude oil for consumption and a commercial reserve than they actually needed, which led to a price collapse at the time. As is usual in such situations, when oil prices rise to record levels, both OPEC and the International Energy Agency (based in Paris, and representing the interests of industrial states that consume oil) issue contradictory statements about the reasons behind price increases. We see now that the agency is trying to accuse OPEC of not producing enough for the increase in the commercial reserve to record levels, while OPEC says that it cannot come up with a surplus energy capacity of more than 2 million barrels a day. OPEC responds, via its secretary general Abdullah al-Badri, and oil ministers in member states, that the market is receiving enough crude oil and that there are no buyers whose requests are being rejected, while the commercial reserve in the US and other industrial countries is at its highest level in years. OPEC also responds that it sees no benefit in supplying markets with additional amounts of crude, if there aren't enough refineries in industrial countries themselves to refine the product, and that this is one of the reasons behind the price rise.
However, in addition to these economic factors, there are also political and financial factors at play. For example, sabotage has struck at oil facilities in Nigeria since February 2006, which up to now has kept around 550,000 barrels a day of Nigerian exports and around 900,000 barrels a day off the market. Although some OPEC countries have increased their production to offset the drop in Nigerian supplies, the loss of Nigerian oil has frightened those working in the markets, and driven prices up. Moreover, there is the continuing fear about the Iranian issue, specifically its nuclear program and the outbreak of an armed conflict between Tehran and Washington. Markets remain fearful about the probable drop in supplies, and resulting price rises, due to these two political factors. These fears of the likelihood of a future drop in oil levels available to markets have led to a rush by hedge funds toward investing in the oil market, and these financial flows headed for the oil market have increased the speed and level of price jumps.
Consumers are affected in various ways by the price increases. Some countries have modified fuel prices from time to time, in light of changes on international crude markets, with a slight time lapse. They raise local fuel prices by the percentage rise in crude oil prices, immediately after a jump in international prices, but wait a month, or sometimes years, before reducing local fuel prices to reflect the fall in international crude price levels. We also see other countries imposing high taxes on gasoline, diesel and other fuels, in order to boost government revenue, which increases the burden on the public.
However, it has become clear that current prices have risen to very high levels, especially if we add to them the high tax levels, creating difficulties for the family budgets of limited-income individuals; it has also become difficult for medium-sized economic and commercial institutions to profit and compete while paying their monthly fuel and electricity bills.
*Dr Walid Kahdduri is an expert in energy affairs.
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