Due to the destruction of refining capabilities by hurricanes, and an expectedly large decline in commercial oil reserves in recent days, the New York market, for the first time, closed on a price above 80 US dollars per barrel on September 13; and hit a new record in the history of nominal prices. As a matter of fact, oil prices have been rising since 2002 at a pace and with a lasting time rarely seen in "peace" time. So, what exactly is behind this round of price hikes?
Firstly, an increasingly short supply of oil in the world is the fundamental cause. According to statistics from the British firm BP, the world has been demanding more oil than can be produced since 1981; and the case is still the same today. Currently, oil production in most countries has already or will soon go down – leaving less of a surplus to use – but at the same time, demand keeps increasing. The supply remains tight and prices keep soaring despite OPEC's decision to increase crude oil production by 500,000 barrels per day as of November 1. With little price elasticity from both demand and supply, any trivial event will send prices skyrocketing.
Secondly, short-term speculations on oil futures by large amounts of funding also drive prices up. A Citi report in May 2006 mentioned that US commodity markets hold an average speculation volume of over 120 billion US dollars each month, chiefly coming from natural gas (30.3 billion dollars) and crude oil (30.1 billion dollars). The numerous speculation deals have a massive impact on oil futures prices considering the leverage effect of futures margin deals. With excessive liquidity worldwide, funds behind oil futures speculations will remain the same.
Thirdly, the US government's pursuit of a weak dollar policy in recent years has also contributed, to a certain degree, to the hike in oil prices. Almost all oil deals worldwide are priced in US dollars; and the dollar's devaluation puts on the pressure for higher oil prices. To maintain an income and purchasing power, raising prices has become a major strategy of OPEC members. According to studies, when the dollar devalues by 1 percent, it causes an oil price hike of the same degree. In addition, technical, meteorological and political elements also affect prices.
It should be noted that although nominal oil prices hit one peak after another, actual prices still remained below historical records; and have a relatively limited impact on the world economy. It appears that the present world economic aggregate is much bigger than that during the oil crisis in the 1970s; but now countries are much stronger in their ability to macro-regulate. Developed countries, in particular, use energies less crazily. Therefore, high oil prices now have a much smaller impact on the world economy than in the past.
A review of the seven-year oil price trend shows that annual peaks usually appear in the summer and autumn, when demand runs high and hurricanes frequently occur; while spring is a period of adjustment. Judging from current conditions, it is difficult for international oil prices to drop back heavily as long as there is no fundamental change in the basic factors affecting price. On the other hand, there is also little opportunity for prices to surge again, unless a major geopolitical event was to occur.
Eighty dollars a barrel is by no means low; and even OPEC's secretary general, Abdalla Salem El-Badri, claimed it is "too high." Master investor Warren Buffett, by cutting CNPC shares he held, also expressed concern about the stability of high prices.
By People's Daily Online
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