As you can also read in Has the bubble popped?, we could see oil prices rise steeply from $16 a barrel in 1999, to $60 dollars with some ups and downs in early 2007, reaching $100 per barrel on January 2nd 2008 and hitting a new record high on July 11th2008 at $147.27 a barrel. Today, U.S. oil is trading a few dollars above $100 a barrel, London Brent crude is hovering slightly below the $100-a-barrel mark. What’s happened? Is this the long awaited turnaround? Should we abandon all that inconvenient talk about energy issues on the occasion of a five month low? Are oil prices now heading downwards, even causing OPEC oil ministers worrying about not being able to pay their bills anymore? Will the Hummer brand turn out to be GM’s saving grace and profit earner? Are airlines set to cut fuel surcharges? Are gasoline prices coming down to $3 a gallon and lower? …
Would be great! But, I have to disappoint you. I can assure you this won’t happen. But,…. Well, if there’s been a bubble, it has definitely popped. After the influx of $60 billion into the oil futures markets between January and May, almost two thirds of that money has already been withdrawn from the markets. And are the fundamentals of demand and supply finally working? Has the high price lowered demand, and caused prices to fall again? Well, probably the high price slowed demand growth at least a bit, but there are other reasons that brought oil prices back towards the $100 mark. The unprecedented price hike in the first seven months of this year was driven by growing demand mainly from emerging economies which need petroleum to fuel the fast pace of their economic growth. Especially China had an additional oil consumption due to the Olympic Games. Another important factor was the weak U.S. dollar and out-of-hand inflation in most parts of the world. With the Federal Reserve cutting interest rates to tackle the effects of the subprime crisis, the inflationary pressures on commodity prices increased. And as I already mentioned, investors poured huge amounts of money into commodities futures as the dollar was sinking in value against other currencies.
Now, the situation is a little bit different. China’s oil consumption will keep growing as it’s the case in Brazil, Russia and India; but the pace of China’s growth is already slowing down. Besides, the United States and many European economies are facing weaker economic growth or even recession. Especially the oil consumption of the United States fell decisively which is not only caused by the economic downturn, but also by the increased awareness for fuel consumption and energy efficiency. American drivers are slowly changing their habits – shifting away from gas-guzzlers (that’s why GM, Ford and Chrysler have problems selling their SUVs and trucks) andcutting unnecessary driving. Public transport companies all around the country report increasing passenger numbers. Moreover, suburban living is not anymore as popular as it once was.
Moreover, the ICE Futures U.S. dollar index, measuring the value of the USD against six other currencies rose to a one-year high according to Reuters. Generally, the trajectories of the USD and the crude oil price change contraryily. When the dollar slides, the price of oil rises and the other way around.
Another factor that could stabilize oil supplies and prices is the huge production potential of Iraq. Much of Iraq’s drilling infrastructure was damaged by the war and the violent conditions have prevented oil production on a scale that could be possible otherwise. But now, Iraq is gradually stabilizing and Western companies try to revive efforts to tap into Iraq’s huge oil reserves and benefit from the extremely competitive production costs of just two dollars a barrel. With the security situation in Iraq having improved, the Dutch and British oil company Shell plans to return to Iraq after 35 years, begin with reconstruction and restart gas extraction at Iraqi oil fields together with an Iraqi partner. Furthermore, Iraq’s oil reserves could prove to be much bigger than generally assumed, because the exploration data and estimates concerning the oil reserves are outdated.
Despite a few positive developments in terms of oil prices, we shouldn’t expect a long-standing period of lower energy prices. On the one hand, demand will inevitably exceed supply (Check out: Oil will become even more expensive, a coming up fundamental transition – scary news) in the long term, and on the other hand, the Organization of Petroleum Exporting Countries (OPEC) is eagerly trying to keep prices high in order to generate enormous amounts of money. To conserve the member’s profits and to prevent oil prices from dipping too far below the $100 mark, the oil exporting cartel decided yesterday night to cut it’s output by half a million barrels a day. Nevertheless, experts don’t expect that the OPEC’s announcement to cut oil production has a lasting impact. The oil price is driven by the global economic development and by emotional behavior on the side of traders and consumers. However, the OPEC’s ignorant and selfish policy should encourage us to push forward efforts to get away from oil. Reducing our dependence on fossil fuels reduces not only our dependence on the OPEC cartel and fragile oil exporting countries, but also reduces the amount of money that is poured into the hands of regimes from Venezuela to Iran. Another point is the environmental aspect and last but not least the economy. Alternatives to fossil fuels help to save CO2 emissions and technologies that help us to get away from oil, create jobs and value at home. So, by embracing environmentally friendly technologies, focusing on efficiency and reducing the waste of resources, we can slow down global warming, save lots of money and reduce pollution.
A quote which a good friend of mine spotted on a Starbuck’s cup lately when I was in Miami Beach: “So-called ‘global warming’ is just a secret ploy by wacko tree-huggers to make America energy independent, clean our air and water, improve the fuel efficiency of our vehicles, kick-start 21st-century industries, and make our cities safer and more livable. Don’t let them get away with it!” Chip Giller
For the rest of the year, most analysts predict oil prices around $100. In the case that a major hurricane threatens the offshore oil production in the Gulf of Mexico, or that violent tensions erupt in the Middle East, prices are likely to go up again. Other experts predict crude oil prices at $80 a barrel by the end of the year. The president of OPEC, Chakib Khelil , said yesterday: “‘Over the next few months, I think everybody agrees that the price is going to stay where it is.”
For those who are interested in this important topic, I recommend to read the International Energy Outlook 2008 from the EIA: http://www.eia.doe.gov/oiaf/ieo/highlights.html