WHY IN THE WORLD IS THE OIL PRICE SO HIGH?

A NY Times discussion of the multivarious factors feeding the stunning jump in oil prices this year comes on the heels of a remarkable development Thursday: Chinese leaders unexpectedly announced increases in their government-regulated gasoline and oil prices, a move experts think will sharply reduce China’s demand. Oil prices in commodities markets around the world dropped 3.5%, adding yet another dimension to the incredible oil price story.

Even before this latest episode, oil market watchers were agog. Stephen Schork, editor, energy newsletter: “This whole industry has absolutely been turned on its head…”

Why?

Some blame the falling dollar but oil prices have not tracked the dollar’s value in the past.

Some blame rising demand. Clearly the impact of the move by the Chinese government suggests demand is a factor.

Some, especially OPEC leaders, blame oil commodities speculators. Congress is considering banning oil commodity speculation by institutional money managers.

The future price is regularly higher than the spot price, suggesting investors expect supply to be inadequate to meet future demand. But refiners are not increasing output or stockpiling.

Do investors see peak oil coming? Do they simply expect the future price to keep going up irrationally? Are they manipulating the market somehow?

Adam E. Sieminski, chief energy economist, Deutsche Bank: “[The high price] doesn’t mean we have a shortage today, but it means there is a serious worry about a shortage three to five years from now…”

Many energy and energy market experts agree with Siemanski that it is supply and demand that is driving the price up but those without a clear understanding of the complexities of the oil market cannot see it. Ex: U.S. demand is falling but Chinese demand is rising more. There are tankers full of sulfur-heavy Iranian oil sitting in the Persian Gulf that nobody will buy at even reduced prices, a supply factor not evident in gross statistics.

Dan Rice, portfolio manager, asset management firm BlackRock: “There are a lot of cross currents making it almost impossible to say where prices are going to go, or where they should be, based on demand and supply…”

Other experts say there is simply no other good explanation EXCEPT commodity speculation. They contend there IS supply to meet demand but complexities give the speculators all kinds of opportunities to work inefficiencies in the market process to their trading advantage.

If there is a speculation-driven bubble, will it burst?

The smartest market watchers put it this way: What in the world is going on!?!

NewEnergyNews: There very well may be a market bubble but beyond it is a peak. The era of cheap oil is gone forever, like the era of the big car and the rotary dial telephone. Whatever happens will be good for New Energy. Nobody is going to drill out of this.

Spot a trend? (click to enlarge)

Why Is Oil So High? Pick A View
Jad Mouawad and Diana B. Henriques (with Vikas Bijaj and Clifford Krauss), June 21, 2008 (NY Times)

WHO
Oil commodity speculators; Congress; King Abdullah of Saudi Arabia

WHAT
As the authors of a NY Times think piece observe, “…the price of oil seems to be changing much faster than the world is changing…” and for reasons nobody is entirely sure of.

The Saudis don't have much more to give. (click to enlarge)

WHEN
- 2002 to 2007: Oil moved precipitously up $60 a barrel.
- Mid-2007 to mid-2008: Oil moved up another $60 a barrel.
- June 6, 2008: Oil price went up $10.75, the biggest single rise in history.

WHERE
- The first time since U.S. oil drilling began in 1859: Oil prices have gone up for 7 straight years.
- King Abdullah has called a global energy summit for June 22 to assess the oil price situation. An Oil Drum study finds the Saudis aren’t likely to do much to significantly increase supply.

There is something Americans can do about the supply/demand dilemma and it's not drilling. (From the NY Times - click to enlarge)

WHY
- Rules seem not to apply. Prices are rising way faster than fast-rising demand. A slow economy like that of the 1970s has not quelled oil price rises.
- Experts predict coming prices from $200/barrel to $60/barrel.
- 8 hearings have been held on possible oil commodities manipulations and improprieties and 4 more are coming soon.
- Commodities speculation is currently being led by money managers with no more expertise in energy than in real estate or tech stocks. The fall of the latter markets has driven institutional investors (and $140 billion to $250 billion) into energy and especially oil markets, adding to the sense of a developing bubble. On the other hand, Barclays bank believes such money is only 2% of oil commodities trding, not enough to affect the market, and an academic study could find on evidence of an impact. Another academic study found iron ore and coal prices to be more volatile than oil.
- The complexities of the oil world are not widely appreciated. There are significant differences in local and region supplies and demand. There are differences in regional oil qualities. Refineries vary in their ability to produce different kinds of fuels from heating oil to vehicle gasoline to high octane jet fuel.

QUOTES
- Michael W. Masters, hedge fund manager: “Institutional investors are one of, if not the primary, factors affecting commodities prices today…”
- Gerry Ramm, senior executive, fuel retailer Inland Oil: “Prices are becoming completely disconnected from the real market.”