Friday, May 23, 2008

Understanding US$130 Oil

Oil is now trading at $130 per barrel. There is a hearing in US to pinpoint the cause of the high price of oil. Yesterday night at 11pm almost every single gas station in Singapore increased their pump prices. My colleagues complain everyday during lunch about their petrol bills.

So far the fingers are pointing everywhere:

1. OPEC - did not increase production as demand rises.
2. Oil Companies - did not increase production.
3. China + India contributed to rise in demand.
4. USA did not tax oil prices enough to curb demand. In Europe the taxes are much higher.
5. Speculators.
6. Subsidies in various countries like Malaysia keeps the pump prices artifically low hence demand remain high in those countries.

Who is guilty? Why is oil trading at $130 and not $60?

The demand for oil is relatively inelastic in developed countries. You drive your car to work so if petrol prices rises by 10%, you still go to work by car. The demand remains about the same regardless of price so is the supply. Supply is close to capacity. There is also no shortage of oil, nowhere in the world are there reports of people queuing up for limited amounts of oil.

When it comes to rising oil prices, subsidy plays an important role in the rise. In countries like Indonesia and Malaysia, petrol is subsidised. This means the govt foots the bill as oil price increases and the drivers pay a low subsidised rate that they can afford. If there is no subsidy in developing countries, the demand will fall alot further because the income level is low and rising oil price will make it unaffordable causing demand to fall. In Singapore, petrol is still a small component of household spending, so the impact of higher prices is limited.

Are speculators to be blamed? Is there a bubble in oil?
Speculators are out to make money and many simply follow trends in price movements. The fact is at $130 per barrel, there has been no significant change in the demand or supply....so the speculators are saying "why not?"...lets push it higher and see what happens. $130 is suppose to hurt enough for consumers to change their habits but they still haven't due to subsidies in developing countries and high income in developed countries.

The good news is the Indonesian and Malaysian govts have announced that they "tak buleh tahan" the price increase and will slash subsidies. The Saudis will increase production slightly and the US will stop topping its strategic reserves. More govts are looking at the high price of oil as an important issue that has to be tackled and they are starting to be pro-active.

At $130, the total value of OPEC's known reserves is worth US$137 trillion. This means the OPEC nations have more than the total financial assets of the rest of world...the Chinese with all their success being the "workshop of the world" has only $1 trillion in reserves. I'm very sure OPEC nations will be very eager to encash all this selling at today's prices....so supply isn't going to fall even if oil price falls to $80 per barrel.

What is needed for oil prices to fall is a slight shift in the demand downwards, this will cause the inventories to buildup as OPEC maintains its production levels and speculators seeing there is no meat left in the oil rally start to sell. This will result in oil prices going down to a "reasonable" level below $100 per barrel.

Despite the reports we see frequently in the papers today about ever rising oil prices and analyst predictions that it will hit $200 per barrel, I believe oil prices will cool off soon.

14 comments:

Anonymous said...

oil us$135 liao leh... I also hope it will cool off within 3 months

Anonymous said...

There is no real shortage. Yet.
This is still a speculative bubble where price have little correlation with actual demand\supply.

What to do.

The first step is to wait for Bush and his cronies to get out of office and hopefully Iraq.

Step 2 is to pray very hard that the USA weans itself off its middle-east oil addiction and starts to invest in renewable energy.


NoName

Anonymous said...

It will be difficult for the USA to wean itself from total dependence on middle east oil because so much of its military power depends on oil. The whole military machinery of the USA will be crippled without oil, its planes, ships, tanks, trucks etc. You cannot possibly run a plane or tank on nuclear or battery power. So, even if Bush and his cronies get out of office, nothing will change in Iraq.

Anonymous said...

Aside from the fact that OPEC is now laughing its way to the bank, one possible positive outcome of the current situation is that it would drive nations to go into alternative fuel development seriously.

Lest we think such alternative fuel development is impractical, the following information might come as a surprise:

:: 19% of electricity in Denmark comes from wind power.

:: 40% of all the fuel that Brazilians pump into their vehicles is ethanol, which is produced from cheap sugarcane.

I believe human ingenuity has all along been capable of inventing viable alternative fuel.

However whether such new technologies would eventually be commercialized depend greatly on the stakeholders in the energy industry in a country - not just oil industrialists but also governments themselves.

Take Singapore for instance. Anyone who has glimpsed the massive oil refinery in Pulau Bukom will understand why for many years the Singapore govt has not shown much interest in alternative fuel research.

That is until a year back when our clever PM launched the investment into this and on the rationale that there is big money in it for Singapore.

What an apt example to show why the world is still captive to fossil fuel. It all about money for the govt . Otherwise why hurt the fossil fuel business which has proven to be such a fantastic cash cow for the govt and its oil industry partners?

The spiraling price of oil - which according some analysts are not likely to fall in the near future due to increasing global demand and production issues - is however driving policy-makers around the world to do a serious rethink on their continued dependence on fossil fuel. It has or ought to become a national security issue now.

It may be a little late to scramble into alternative fuel research in a big way but it is better late than never.

LuckySingaporean said...

::::: 40% of all the fuel that Brazilians pump into their vehicles is ethanol, which is produced from cheap sugarcane.::::

Many people think of China and India as growth areas but Brazil is just fantastic these few years - the govt is simply outstanding and far sighted.

Onlooker said...

Trade Oil in Euros and an Asian currency and watch the speculation in China/India fade away by the way the 2 country is also buying up food commodity.
Sad for their fellow country man? They see the disaster as a way to get rich quick.By buying up supplies (including oil, food) that would be bought at a higher price by their govt.Guess where the husbands get their money from?
Hint children and wife working in other countries.
And industrial chemical ingredient are use to make pills(yes those walnut power and slim ten pills)

Anonymous said...

00000I believe human ingenuity has all along been capable of inventing viable alternative fuel.00000

we have invented our problems also

Anonymous said...

...and continue to invent our problems..;)

if the structure remains

Anonymous said...

The issue of fossil fuel and environmentalism is now inseparable.

Governments elsewhere that have adopted new alternative fuel technologies and other energy policies both out of a need to protect the livelihood of its citizens and to protect the environment through cleaner energy will be far ahead of Singapore on this count.

For example, Australia despite being a country with vast resources has implemented a nationwide policy to phase out completely traditional lightings for energy-saving ones by 2010.

PAP is not about to do this because Singapore Power would then lose much revenues thereby. What does PAP care for the environment? Or for that matter its citizens' welfare even though switching over to energy-saving lightings in public places will definitely result in savings by town councils' expenditure that can be passed on to HDB dwellers in the form of lower monthly service and conservancy charges.

Still the PAP wants to go into basic alternative energy R & D to make Singapore into a 'global clean energy hub' when other developed nations are already decades ahead on it.

PAP continues to hallucinate that because it has so many bright minds it are capable of beating all odds.

Its S$350 million 'global clean energy hub' venture will prove to be another big fiasco for PAP just like its venture into basic biotech research.

Anonymous said...

Here in norway the official figure are 2,4 % at the same time the Norwegian currency have almost doubled compared to the dollar since 2002. I can't understand how the US inflation figure can be right, it's probably closer to 15 %. The real inflation figure here in Norway is probably closer to 10 %. The price of my favorite candy are up around 9 % each year

You are right on oil. The speculators are testing how far they can push the price before storage numbers get to big, helped by peak oil, and much bigger Asian demand than before. Before Asians entered so much into the demand, OPEC, and Saudi Arabia would cut production when prices fell, but the amount they have to cut to get the price back up have been getting smaller and smaller, because of the bigger Asian demand, and since 2007 they have been running at full capacity. There is no spare capacity, no at all. The price could very well go to 200 dollar or more. It's not a bubble before demand fall off more.

Anonymous said...

And, if the storage numbers starts to add up at around 150 dollars, OPEC and Saudi Arabia can start to cut, something they are not doing at the present. I think 250 dollars are possible if OPEC starts to cut production.

Anonymous said...

The OPEC reserves you calculated?? If you should get the number correct you must use the reserves reported before 1984, and subtract all oil produced since 1984, no really easy task. Most of the later reserves are just a wild fantasy, used to be able to produce more, as their reserves determine how much they are allowed to produce.

Anonymous said...

in any case, i do not foresee the problems caused by the oil issue be resolved in the next few decades. even if we ve found alternatives, the changes would probably hv to tax too many other resources and will still be overbearing on the global economy. with global growth, which is resource demanding, being the constant, you can only hope to plug one hole and expect more holes to appear somewhere else before the dam wall collapsed!

the news on...goodbye to budget flights seems to enforce the gloomy outlook further. is it going to dam our dreams of flooding our economy with big spending tourists? with more commercial spaces on the pipeline, businesses and many jobs will certainly be on the line.

more homes, more people or foreigners, more resource demanding, more reliant on external factors etc etc

we can only hope to be a better leech but even then, the big boys may just decide to smack us from behind to stop their bleed!

mint said...

find it puzzling why oil price is always climbing to new highs. There's no demand or supply shocks. Will the oil price ever reach its equilibrium? It's burning a hole in our pockets and our brilliant govt hasn't got a good solution yet.