Oil prices: Who's to blame?

The world is awash with an oil glut so why are prices so high? Speculators and oil refining capacity are major causes.

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By  Nicholas Wilson Published  September 6, 2005

If we were told that the world’s oil supply has been greater than demand in the past two years, we might dismiss it as coming from someone who hasn’t been to a petrol station to fill up his car in quite a while. Over supply leads to a glut, which drops prices doesn’t it? But the person who said it last month is a man who ought to know, being none-other than Kuwait’s energy minister and Organisation of Petroleum Exporting Companies (Opec) president Sheikh Ahmed Fahad Al Sabah. What’s more, he’s right. Yet oil prices flirt with US $70 a barrel, and Goldman Sachs, a dominant commodities market player, said it expects five-year contracts to hover around US $60 per barrel. So we might be forgiven for wondering if there’s a surplus then how come prices have more than doubled in the time when more oil than consumers asked for was pumped onto global markets. Top of the culprits list are speculators. This year they have poured some US $25 billion of net new hot money onto the oil market futures fire and show no sign of looking for the extinguisher. The result is futures price flames dancing even higher than those in the spot market. It would only take a down turn in inventories while futures prices stayed up and the spot market would heat up even more. It is in markets where human fears and good old-fashioned greed make things far less predictable than the down-to-earth world of pipelines and pumps. Sheikh Ahmad said “psychological”factors had a far greater impact on today’s prices than actual oil coming out of the ground. He cited the example of the US announcement that its reserves remained the same driving prices up, which then dropped back again a few days later. Other factors are politics and instability, such as mounting tension between the West and Iran in its nuclear stand off. Oil pundits are betting on whether Iran will continue with its brinkmanship and if the West will go for economic sanctions via the United Nations: Sanctions that may be blocked by Iran’s new found military and energy pals in Russia and China. A terrorist attack in a big oil producer, an unexpected death of a ruler or the overthrow of a government could also drive prices higher. The third major reason for prices that are causing violence at the pumps in some countries is refining capacity, or lack of it. The US hasn’t built a new oil refinery since the 1970s and the recent rush by mainly oil producing countries to get more refined products to the market place won’t show significant results this year. Previously the profit margin on sour oil refineries didn’t make it worth anyone’s while to build any more. Exasperating the problem is the number of plant breakdowns this summer across the US during its driving season. None of these factors have anything to do with getting more oil out of the ground into a market that is already awash with it. It would be ironic if the grim warning of Henry Kissinger, former US secretary of state, about forthcoming life and death global battles for control of energy resources came about, not due to lack of oil, but because of speculators, human fears, market whims and poor planning.

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