Surprise, surprise - guess who is
causing oil prices to rise ?
OPEC drives up oil prices in a new way
The oil-producing nations' fast-growing,
subsidized economies and soaring consumption of petroleum are big
reasons the rest of world is paying more for its crude.
By
Jim Jubak
This time, OPEC really is to blame for higher oil prices.
In recent days, oil traders and speculators have forced the price
of oil above $80 a barrel despite the Organization of Petroleum
Exporting Countries' decision to raise production.
I fully expect oil prices to keep rising for the rest of 2007 and
into 2008. The only thing likely to stop oil from climbing to $85 a
barrel is profit-taking by speculators themselves.
Not every OPEC country is happy about this rise in oil prices. The
Saudis, for example, have argued for increased production to hold
down prices and keep demand from falling. But oil prices are headed
up no matter what OPEC says or does.
And OPEC really doesn't have anyone else to blame for its inability
to set prices. Runaway demand in the oil-producing countries
themselves is the newest factor pushing up global oil prices.
Why prices are still rising
You can see where oil prices are headed in the reaction Sept. 12 to
OPEC's announcement that it would increase production. Despite the
news, prices went up that day. The price of a barrel of benchmark
West Texas Intermediate crude climbed $1.68 to $79.91.
The next day, crude tacked on an additional 13 cents a barrel to
close at $80.04. Speculators were ecstatic: Hedge funds and other
traders have staked out big positions in the options market at $80
a barrel that are worth billions as oil climbs above that
level.
So why were traders able to move oil prices up in the face of an
OPEC production increase?
A 500,000-barrel-a-day increase in production is little more than
symbolic. If the Saudis, the driving force behind this increase,
were serious about holding prices at this level or driving them
down, they would have pushed through an increase of 1 million
barrels or more. All an increase of this size does is ratify
current levels of production, which are as much as 2 million
barrels a day above the official quota.
There's a huge debate inside the oil industry and in the commodity
pits about the status of Saudi oil reserves. The Saudis, who
produce 9.5 million barrels a day now, have announced they will
boost production to 12.5 million barrels, a 32% increase, by the
end of this decade and to 15 million barrels by the end of the next
decade. However, some oil traders and industry analysts don't think
Saudi Arabia can deliver and contend that the Saudis' big oil
reserves are in far worse condition than they are letting on. The
impact of any shortfall would be huge because the Saudis are the
only likely global source of a major increase in oil production in
the next five years, according to the International Energy Agency.
Without that production increase, the world is headed for a very
painful short-term oil squeeze, the agency has concluded. So you
can think of energy traders' bets on oil climbing above $80 as a
huge vote that the Saudis won't or can't deliver as promised.
Traders and analysts also aren't convinced that OPEC as a whole
wants to increase production. The Saudis carry great clout inside
that organization, but they have faced fierce opposition this year
from an OPEC faction headed by Venezuela and Iran that is adamant
about keeping prices as high as possible. Both countries
desperately need high oil prices: Oil revenue is the only thing
that stands between the regimes that rule in Caracas and Tehran and
huge, possibly uncontainable protests. Anything that cuts into
revenue, endangering subsidies that keep gasoline prices in Iran
near 40 cents a gallon and that fund cheap food and health care in
Venezuela, would be a political disaster.
In the past, Venezuela and Iran probably wouldn't have carried the
day. OPEC regularly raised production to modulate price spikes, so
that peak oil prices wouldn't cut into global economic growth,
leading to lower demand for oil and a plunge in oil prices.
In other words, OPEC felt it was in its own interest to avoid
pushing the global economy into a slowdown with unsustainably high
oil prices. Sometimes OPEC got it wrong and set prices too high or
moved too slowly to lower them, but heading off an economic
slowdown has been a fundamental part of OPEC policy.
Why higher prices haven't cut demand
But recently, higher global oil prices haven't reduced global
demand for oil or pushed economies into recession. In its Sept. 12
projections, the International Energy Agency cut its estimate of
global oil demand for the end of 2007 to 85.9 million barrels a
day, but that is still 1.7% higher than demand in 2006. For 2008,
the agency is projecting a 2.4% increase in demand.
We're less energy intensive
You already know part of the reason for that. The developed
economies of the world have become a lot less energy intensive over
the past three decades. For example, in the United States, energy
use per unit of economic production (gross domestic product) fell
by 28% from the OPEC oil embargo of 1973 through 1995.
Higher oil prices were responsible for much of that decrease in
energy use. From 1995 through 2004, energy use per unit of the
economy fell an additional 26%. This time the decline had less to
do with energy prices, which plunged at the beginning of that
period, than with the steady shift of the U.S. economy from
manufacturing to service industries. The same trend shows up in
Europe and Japan.
Because these economies use so much less energy per unit of GDP
than they did 30 years ago, they're a lot less sensitive to
increases in energy prices. Energy is simply a smaller part of the
cost of doing business in these economies for most companies.
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