Consumers should not dream about low oil prices in the near future as rising energy demand from emerging markets and speculation in commodity exchanges will keep prices at high levels, experts say.
Crude oil prices, which were hovering at around $30 a barrel at the beginning of the third millennium, have increased more than 300 percent in just 11 years. The higher-than-expected demand for oil in countries around the world, particularly in the world's two giant developing nations China and India, has boosted oil prices. Also, the strengthening economy around the world has placed more pressure on consumers to use larger cars such as sport utility vehicles (SUVs). However, oil exporting nations have not increased supply in line with the rising demand, leading to an imbalanced growth in the market.
Moreover, events such as the recent popular unrest in the Middle East and North Africa (MENA) have added further upward pressure on oil prices as they increased worldwide worries on the supply side, as some oilfields were blasted during clashes between forces loyal to the leadership and pro-democracy groups. The fear that these anti-government protests would spread to Saudi Arabia, which could interrupt oil production, led to a surge in oil prices to over $105 a barrel a week ago.
However, oil prices then fell sharply on Tuesday on fears that Japan's economy could worsen after the devastating earthquake, tsunami and the unfolding nuclear power plant disaster. In a previous article, Reuters reported that the cost of the destruction is likely to exceed that of the catastrophic 1995 Kobe earthquake -- estimated as $159 billion by Standard & Poor's. The four most severely affected prefectures -- Iwate, Miyagi, Fukushima and Ibaraki -- are home for auto parts and electronics industries and make up some 6 percent of Japan's national economy. These negative figures in Japan, the world's third-largest oil importer, have led investors to worry about a possible contraction in oil demand since it could take years for Japan to recover its manufacturing sector.
In a statement to Reuters, Tom Bentz, director of BNP Paribas Commodity Futures Inc., said he thinks oil prices will fall further because of ongoing concerns about Japan. Bentz argued prices could fall as low as $95 a barrel in the coming weeks. “It's going to take a while before Japan is able to recover from this, and the market is starting to price that,” he said.
However, Professor Paul Stevens, a senior research fellow at Chatham House, indicates in his article “The ‘Arab Spring' and Oil Markets” that the increase in oil prices does not merely depend on supply concerns but on the developments in the “paper” markets -- the NYMEX in New York and the ICE in London.
“There have been fears of contagion with many ‘paper-barrel-players' assuming the Arab world is all the same. They expect what happens in Tunisia and Egypt today will happen in the major oil producers of the Gulf tomorrow,” he said, referring to speculators placing bids on commodities. Stevens underlined that the outcome of the “Arab Spring” and how the “paper-market-players” will perceive the developments in MENA will determine oil prices.
A Turkish energy specialist, who preferred to remain anonymous as he is not authorized to make a statement, said it is impossible to forecast the trend of oil prices in the short term. He stated that there are many factors determining international oil prices, while most of them are beyond people's control. “For instance, could someone predict the unrest in the MENA region? Or the catastrophe in Japan? Both of these events have influenced oil prices,” he said.
However, he also shared similar views with Stevens regarding oil price speculation in international commodity markets. In line with this view, Turkey's Energy and Natural Resources Minister Taner Yıldız said in a previous statement that oil prices surged by 10 percent while the oil supply in Libya -- a moderate oil producer -- decreased only by 1 percent. “I see this as a speculation,” he said.
Since the international oil market is very sensitive to speculative moves by hedge funds, many countries are looking for alternative energy sources. Sustainable energy is one of the hot topics that have emerged ever since energy prices soared, threatening the world with an unwelcome rise in inflation and tampering with economic growth. The question arises whether these negative effects caused by high oil prices can be minimized by improving sustainable energy sources.
The same Sunday's Zaman source said by 2023, 10 percent of the world's energy needs will be met by sustainable energy sources. “However, 90 percent of energy needs will still be met by fossil fuels, like oil,” he said. “And considering the fact that the world demand for oil is growing at a higher rate than sustainable energy sources, people should not expect oil prices to drop significantly.”
The World Energy Council's Ankara-based Turkish National Committee (DEK-TMK) board member Necdet Pamir argues that the current high prices cannot be explained by the supply and demand relationship considering the cost of producing oil in oil-rich countries like Saudi Arabia and Iran is around $4-5 a barrel. “The price of a product will increase if it is rare or if there is not enough supply to meet the demand. The Oil Producing and Exporting Countries [OPEC] have a daily spare oil capacity of 4.8 million barrels, which is far more than the decline of 700,000 barrels of oil in Libya that boosted oil prices. This means that the world has enough oil supply to cope with these price fluctuations. To be precise, the current high oil prices are just an outcome of speculators,” he told Sunday's Zaman, adding that these high oil prices are a must for oil exporting countries to balance their state budgets since oil revenues are the most crucial source of revenue for them.
It seems that speculation in the “paper-market” and OPEC's slow response to increase the oil quota are the major reasons behind surging “black gold” prices. The 12 ministers of the nations that form OPEC blame speculators for the surge in prices while ignoring their own role in preventing oil stock increases. Furthermore, when considering the expanding global economy -- led by China -- the hope that oil prices will return to lower levels seems to be diminishing. The bottom line seems to be that oil-importing countries need to accept and become accustomed to the reality of high oil prices.
(Source: http://www.todayszaman.com/news-238681-market-speculation-rising-demand-inflate-oil-prices.html)
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