Economy and geopolitics decide where oil goes
next
Port Spain
Petroleumworldtt.com
01 13 08
NOW
that the price of crude oil has crossed the US$100-a-barrel
threshold, and then retreated slightly, what
direction will it take now?
Many experts say it will go up, then down, and
then maybe up again. That, anyway, has been the
pattern of the last several years of volatile prices.
The arguments for even higher oil prices are well
known. The economies of China and India are booming
and hungry for energy. Oil fields in Mexico, the
United States and several other oil producers are
drying up, tightening world supplies.
President Hugo Chávez of Venezuela is using
oil as a political weapon. Rebels in Nigeria are
creating havoc in some of Africa’s most productive
oil fields.
The war in Iraq rages on. The dollar is weakening,
causing hedge funds and traders to flee to oil
and other commodities as a safe haven.
But all those factors were in play last summer
when the price fell to about US$60 a barrel, before
it rallied at the end of the year. The price touched
US$100 on Wednesday and surpassed that briefly
on Thursday before retreating after the government
reported higher-than-expected heating oil and gasoline
supplies. The price settled at US$99.18 a barrel,
down 44 cents.
“Predicting oil prices continually demonstrates
the perils of prophecy, because oil prices are
the derivative of what happens in the global economy
and global geopolitics,” said Daniel Yergin,
chairman of Cambridge Energy Research Associates.
Yergin said he could foresee oil prices surging
as high as US$150 in the next few years or falling
as low as US$40.
John Richels, president of the
Devon Energy Corporation, an international oil
and gas company based in Oklahoma
City, said US$150 a barrel was possible, but so
was US$55. “We have to make investments based
on our outlook over a long period of time,” he
said. “It is tough.”
Alternative fuels
Central to the question of where oil prices will
go is the effect of high prices on the consumption
and development of alternative fuels.
Large amounts of public and private investment
are going into solar, wind and biofuel development,
but so far they are making only a slight contribution
to energy supplies. Scientific and engineering
leaps, like developing the atomic bomb or sending
a man to the moon, can be made relatively quickly,
but they are still measured in years.
Until now, most economists have
been surprised that the rise in oil prices—from as low as
US$11 less than a decade ago—has not had
a greater effect on American consumers. But with
oil prices rising at an increasingly rapid rate
over the last few months in conjunction with the
housing market slump and credit squeeze, many economists
now wonder whether oil prices could tip the economy
into a recession.
A recession, of course, would curb oil demand.
That would push oil prices right back down again,
or so the theory goes, as fewer consumers drive
to the mall, companies produce and ship less and
world trade slows.
“If we are slowing down, we will not be
buying as much goods from China and services from
India,” said Addison Armstrong, director
for market research at Tradition Energy, an energy
broker that deals with banks and hedge funds.
“My forecast for 2008 is
that crude prices will average US$75 a barrel,
and that is based
on a scenario of a slowing economy in the United
States.”
But Armstrong and other experts cautioned that
a protracted insurgency in Nigeria, a punishing
hurricane season or other unpredictable events
could take oil prices up even more.
Tensions in Iraq
So why are oil prices going up now? The military
situation in Iraq is arguably improving, and Iraqi
oil exports are beginning to flow again. Tensions
with Iran have eased a bit. There are forecasts
for a mild late winter in the United States, which
should help bolster oil and gasoline inventories
going into the spring and summer driving season.
Many experts say the answer lies in the investment
decisions of traders and hedge funds. With the
markets in equities, housing, credit and currency
shaky in the United States, traders are betting
on oil and other commodities as a perceived safe
haven.
Phil Flynn, a vice president and
market analyst with the Alaron Trading Corporation
in Chicago,
said the recent interest rate cuts by the Federal
Reserve had underscored for traders the depths
of the country’s economic risks and led them
to buy oil futures.
Story
from Trinidad Guardian
Trinidad
Guardian
Thursday
10th January, 2008
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