PRICE DYNAMICS

Price Dynamics

Price Dynamics

Factors of High Oil Prices

In the past few weeks, oil prices have ranged between 97 and 99 dollars per barrel for the North Sea Brent, and around 88 and 93 dollars for the light American crude. The data available indicate that rise in oil prices will continue, and may even increase further. The causes behind rising prices involve a number of factors, most importantly the industrial and natural disasters, which prompted production shutdowns almost simultaneously, from Alaska, Norway and Brent crude in the British North Sea, to coal in Australia as a result of floods, where coal in power plants worldwide has to be replaced with fuel oil.Then there is the desire of the industrialized countries to have “suitable” and “encouraging” prices that would support research and boost tapping into alternative energy sources. This is largely similar to price hikes in the mid-seventies, which encouraged deep-water production at the time, such as in the North Sea and elsewhere.Yet, in addition to these factors, there is also a fundamental trend with significant implications for oil markets, present and future. It is the increase in demand by about 1.5 to 1.8 percent (and even 2 percent). This is an important trend with far reaching significance that goes beyond the present situation. The above mentioned tendency involves continued demand in industrialized countries, especially the United States, and also, as Saudi Oil Minister Ali al-Naimi said last week, a continued increase in demand in emerging Third World countries, where it will overtake that of industrialized countries in 2013. This increase in demand is taking place in Asia (China and India), the Middle East (especially in oil producing countries) and Latin America. This means that demand will increase more in the middle of this decade in third world countries than in industrialized countries, for the first time in the history of the global oil industry. However, despite these fundamental increases in demand, and the responsibility lying on OPEC to meet the challenge of supplying markets with the required additional quantities of oil, given the relative decline in supplies by non-OPEC states; despite this, supply and demand remain balanced in the markets. At present, there are no reports of supply shortages, or of failure by any member state to meet the requirements of their supply contracts. Al-Naimi said in this regard that OPEC's surplus production capacity currently stands at six million barrels per day, including four million barrels produced by Saudi Arabia this year. This means that OPEC states have surplus production capacities that can secure the necessary supplies to the markets if needed, and rather quickly.These are fundamental manifestations in the global oil industry, driving prices to higher levels. However, they are accompanied by other factors that also drive prices up. For example, temporary production shutdowns for technical or natural causes leads to an increase in speculation and forecasts on supply and demand dynamics, which in turn drives prices further up. In fact, speculations are exacerbated by some of the statements given by ...