he Wild Ride of Rising Oil Prices Continues

By Heide B. Malhotra
Epoch Times Staff
Created: Apr 2, 2011Last Updated: Apr 2, 2011
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Traders work in the crude oil options pit at the New York Mercantile Exchange on March 22 in New York City. (Photo by Mario Tama/Getty Images)
Lately,when governments of countries are looking forward to climbing out ofthe recession and leaving the economic meltdown a little more behind,they are suddenly hit with another problem that may spell disaster.

“The economic recovery is on a firmer footing, and overall conditionsin the labor market appear to be improving gradually,” according to amid-March Federal Reserve System press release.

The releasefirst hands out the positive news and then cautions the reader,“Commodity prices have risen significantly since the summer, andconcerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.”

Crude oilprices have been rising rapidly, with the WTI-Cushing Oklahoma spotprice having jumped from $97.23 on March 15 to $104.53 by March 22,while the Europe Brent spot price rose from $111.11 to $115.63respectively.

Many theories are expounded by experts, with someclaiming that unrest in the Middle East with the associated politicalinstability is affecting the rise and fall of oil prices, while othersput the blame squarely on economic factors, natural disasters, and lastbut not least, the unorthodox trading practices by big-time oil traders.

“Oil markets run wild. Big traders are making a record bet that crude prices,up 26% over the past year, will rise further as unrest rattles theMiddle East,” according to a posting on the Energy Bulletin of the postcarbon institute website.

Although this writer qualifies hisstatement by saying that the rise in oil prices is not due toirresponsible gambling by oil traders, an Internet search indicates that irresponsible trading practices have not been put to rest.

The article suggests that the culprit of rising oil prices is energydemand by the world’s people. What comes into play is the economictheory of supply and demand, that is, when supply decreases and demandgoes up, the prices will inevitably move upward.

On the otherhand, the U.S. Energy Information Administration (EIA) blames thenatural disaster in Japan and political upheaval in the Middle East forthe most recent oil price increases.

“The recent supply disruption in Libya and the subsequent near-term disruption of oil demand in Japan have sent crude oil prices on a roller coaster,” states an EIA March 23 press release.

The release goes on to say that the day when the Libyan protestspeaked, the Brent spot price reached $103 per barrel of oil. Just 16days later, the Brent reached $117 a barrel, and then when the newsabout the Japanese natural disaster hit the airwaves, it dropped to$111 a barrel.

Wake-Up Call Concerning High Oil Prices

“Oilprices swung wildly this week, rising to near 30-month highs. ... Theride is not over yet. … There may be ups and downs, but long term, highoil prices are here to stay,” predict analysts and professors in aKnowledge@Wharton (KW) March article. KW is a publishing arm of theUniversity of Pennsylvania.

Among others, naturalcatastrophes, political turmoil, the economic theory of supply anddemand, negative media coverage about dwindling supplies, and possiblefurther disruptions are the main drivers of crude oil prices.

Different influencingfactors may have opposite effects on oil prices, taking them for aroller coaster ride. Japan’s catastrophe had a downward effect on oilprices because the market expects, given the damaged oil refineries, amuch lower Japanese demand for crude oil, lowering the price. Then, shortly after, Bahrain demonstrations drove crude oilprices up, because the world sees Saudi Arabia surrounded by countriesexperiencing political unrest. So, the guessing game is on amongexperts, and no one is really sure what the future brings.

Adetrimental effect could be the fear of nuclear power plants, givenJapan’s disaster. “Longer term, a backlash against nuclear energy—inJapan and beyond—could drive oil prices back up again,” KW speculates.

 


revival is still rather fragile, speculations come into play, and the KW article suggests that a spike in crude oil prices could reverse the upturn. Such increases would result in rising gasoline and heatingoil prices, putting stress on individual households to meet everydayliving costs. Companies would have to lay off people to meet risingenergy costs, affecting the unemployment lines.

However, theprofessors are upbeat and consider the above no more than assumptionsand possibilities. But, at the same time, they are speculating that ifSaudi Arabia is hit by an economic disaster, the economic recovery willtake a dive.

Also, the U.S. economy is less energy dependentthan years ago, suggesting that energy for production purposes hasdecreased by half, as the majority of U.S. manufacturing has beenoutsourced to foreign shores, and the remainder has become much moreenergy efficient.

Additionally, renewable energy products are curtailing the need for oil derivatives.

“We’re closer to alternative sources of energy for our transportation,which would be accelerated if oil really moved up,” said Jeremy Siegel,professor at Wharton Business School, in the KW article.

The professors are very cautious in their predictions of possiblefuture oil price jumps. They suggest that an increase from $98 a barrelas the steady future price, to $200, could only happen if Saudi Arabiawere to experience a political upheaval.

“We’re all focused on the Middle East and NorthAfrica, but a lot of the same conditions exist in Equatorial Guinea,Angola and Nigeria. I’m not saying they’re going to go like dominoes,but it takes uncertainty about [just] one of them to create a realproblem,” said Witold Henisz, professor at Wharton and oil company initiative expert, in the KW article.

Oil Running Economy of World’s Largest Oil Exporters

“SaudiArabia has one-fifth of the world’s proven oil reserves [approximately260 billion barrels in 2010], and maintains the world’s largest oilproduction capacity,” according to the EIA website.

The UnitedStates, European, and Asian nations consider Saudi Arabia their mainoil supplier, and any disruption would negatively affect the economiesof many nations.

Saudi Aramco, which is owned by the Saudis,has a mission to explore for more oil reserves, though their luck seemsto have run out lately, because of very little new oil fielddiscoveries. Without oil exports, Saudi Arabia’s earnings from crude oil sales would be affected, as it contributes close to 90 percent of that country’s revenues.

Saudi Arabia was recently outpaced by Venezuela, whose presidentannounced at the beginning of 2011 that their proven reserves reached297 billion barrels, and they are now the country with the largest crude oil reserves.

Libya’s earnings from hydrocarbon exports reached 95 percent in 2011,and this country is known to hold approximately 46 billion barrels ofoil, the largest oil reserves in Africa. It is ranked ninth in the worldwith regard to proven oil reserves.

While Saudi Arabia’sexplorations are coming up dry, analysts suggest that Libya still haslarge amounts of undiscovered oil fields and might surprise the world’soil experts in the long run.

The United States has 21 billion barrels of proven oil reserves as of 2011, a smidgen when compared to Saudi Arabia.



revival is still rather fragile, speculations come into play, and the KW article suggests that a spike in crude oil prices could reverse the upturn. Such increases would result in rising gasoline and heatingoil prices, putting stress on individual households to meet everydayliving costs. Companies would have to lay off people to meet risingenergy costs, affecting the unemployment lines.

However, theprofessors are upbeat and consider the above no more than assumptionsand possibilities. But, at the same time, they are speculating that ifSaudi Arabia is hit by an economic disaster, the economic recovery willtake a dive.

Also, the U.S. economy is less energy dependentthan years ago, suggesting that energy for production purposes hasdecreased by half, as the majority of U.S. manufacturing has beenoutsourced to foreign shores, and the remainder has become much moreenergy efficient.

Additionally, renewable energy products are curtailing the need for oil derivatives.

“We’re closer to alternative sources of energy for our transportation,which would be accelerated if oil really moved up,” said Jeremy Siegel,professor at Wharton Business School, in the KW article.

The professors are very cautious in their predictions of possiblefuture oil price jumps. They suggest that an increase from $98 a barrelas the steady future price, to $200, could only happen if Saudi Arabiawere to experience a political upheaval.

“We’re all focused on the Middle East and NorthAfrica, but a lot of the same conditions exist in Equatorial Guinea,Angola and Nigeria. I’m not saying they’re going to go like dominoes,but it takes uncertainty about [just] one of them to create a realproblem,” said Witold Henisz, professor at Wharton and oil company initiative expert, in the KW article.

Oil Running Economy of World’s Largest Oil Exporters

“SaudiArabia has one-fifth of the world’s proven oil reserves [approximately260 billion barrels in 2010], and maintains the world’s largest oilproduction capacity,” according to the EIA website.

The UnitedStates, European, and Asian nations consider Saudi Arabia their mainoil supplier, and any disruption would negatively affect the economiesof many nations.

Saudi Aramco, which is owned by the Saudis,has a mission to explore for more oil reserves, though their luck seemsto have run out lately, because of very little new oil fielddiscoveries. Without oil exports, Saudi Arabia’s earnings from crude oil sales would be affected, as it contributes close to 90 percent of that country’s revenues.

Saudi Arabia was recently outpaced by Venezuela, whose presidentannounced at the beginning of 2011 that their proven reserves reached297 billion barrels, and they are now the country with the largest crude oil reserves.

Libya’s earnings from hydrocarbon exports reached 95 percent in 2011,and this country is known to hold approximately 46 billion barrels ofoil, the largest oil reserves in Africa. It is ranked ninth in the worldwith regard to proven oil reserves.

While Saudi Arabia’sexplorations are coming up dry, analysts suggest that Libya still haslarge amounts of undiscovered oil fields and might surprise the world’soil experts in the long run.

The United States has 21 billion barrels of proven oil reserves as of 2011, a smidgen when compared to Saudi Arabia.