BEIJING, Sept. 19 -- 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 U.S. dollars per barrel on Sept. 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 Nov. 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 U.S. 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 U.S. 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.
(Source: People's Daily)
