SPECULATION, GEOPOLITICS AND THE PRICE OF OIL

The OPEC nations like to make money. No surprise? OK, then why aren’t they pumping more oil into the system while prices are higher than a 1960s college student?

2 possibilities: (1) They can’t pump any more; Or, strange as it seems, (2) pumping more oil won’t relieve demand.

A lot of people insist the first explanation is the right one because if they could pump and sell more oil they would - because they like to make money.

OPEC says it’s the second explanation. HE Abdalla Salem El-Badri, Secretary General, the Organization of the Petroleum Exporting Countries (OPEC): "Crude oil prices have become detached from the dynamics of supply and demand…"

Oil prices are so out of line they’ve become a problem even for oil producers. Nobuo Tanaka, Executive Director, International Energy Agency (IEA): "[Prices are] too high for everybody, especially for developing countries who face other significant cost increases."

There is a curious and potentially tragic pattern developing. Rising populations in developing countries are consuming larger gross quantities of oil but it is drastically smaller per capita consumption. Badri: "…energy poverty will remain an important challenge. By 2030, developing countries will consume, on average, about five times less oil per person than OECD countries…"

Meanwhile, oil traders are hustling oil, driving prices up, and neither OPEC nor the IEA can get a bead on the arcana of commodity transactions and individual company supplies that might bring more rationality to the marketplace. Tanaka: "[The] major problem…[is the] lack of stock data…Individually countries may feel their data is sensitive…but globally a lack of transparency aggravates [market] volatility."

With peaking supplies, OPEC could put itself in such a powerful position. Instead, as its member states pull against one another, prices drive the market toward New Energy development.

OPEC has always been its own worst enemy. It’s the only comfort for the equally impotent leaders of the developed economies.

And it’s great news for New Energy.

Tanaka: "In the short-to-medium term, there is an urgent need for investment to restore an adequate cushion between oil supply and demand…But for the longer-term, to meet environmental concerns, we will require a new global energy revolution to transform the way we produce and use energy."

Demand is only going one way. (click to enlarge)

OPEC: Oil Market ‘Detached’ from Supply and Demand
Kerry Laird, April 21, 2008 (RigZone)

WHO
HE Abdalla Salem El-Badri, Secretary General, the Organization of the Petroleum Exporting Countries (OPEC); Nobuo Tanaka, Executive Director, International Energy Agency (IEA);

Lots of reserves, and even some new deep water giant discoveries, but all of it won't get to the 120 million barrels/day demand that is coming. (click to enlarge)

WHAT
“Non-fundamental factors” – commodity market speculation, a weak dollar and geopolitical tensions – are the driving factors in rapidly rising oil prices. Meanwhile, the oil industry is not profiting or building itself.

WHEN
April 28 price of oil: $118.50 (NYMEX Crude Future), $118.75 (West Texas Intermediate spot price in Cushing, Oklahoma)

click to enlarge

WHERE
- The Tanaka and Badri observations were made at the 11th International Energy Forum in Rome, April 21.

WHY
- The title of Badri’s talk: "Reflections on key oil challenges and opportunities"
- OPEC and the IEA expect oil demand to remain strong in the transportation sector.
- Developing countries, where high oil prices are now creating economic stresses, are expected to be central to the future of oil demand in the coming decades.
- Tanaka and Badri agree that the weak dollar means it costs more dollars for the same amount of oil.
- Ironically, Tanaka described oil as an "underinvested commodity" because there is way too little of oil profits being spent on exploration & production and on industry infrastructure to sustain the oil economy.

Sometimes one picture really is worth 10,000 words. (click to enlarge)

QUOTES
- Badri: "OPEC has played a vital role in keeping the market well-supplied during the recent volatile period, with our Member Countries increasing crude output, as needed, and accelerating capacity-expansion plans…There are, for example, more than 120 upstream development projects, and cumulative investment in new capacity exceeds US $150 billion."
- Badri, on oil demand and poverty: "Most of the new demand will come from developing countries, with consumption doubling to 58 mb/d, and Asia will account for more than half this increase…"
- Tanaka: "Oil prices are higher in all currencies…"