Often it is stated in articles that a certain amount of the going oil price is the result of speculation and estimates are made of how much per barrel is caused by speculation. How on earth are these estimates made? For example:
http://www.thetelegram.com/index.cfm?sid=116864&sc=80
Speculation makes oil prices rise PAUL STRIDE
World energy prices, specifically oil, have been a topic of many books, talk shows, documentaries and on down to the 10 a.m. gathering at the water cooler. It’s not surprising when just this week, a barrel of oil exceeded the numerical and psychological barrier of $100, reaching an all-time high at just over $108.
A marginally connected global warming issue will find concern in many people, and most appreciate the link between high prices and our province’s fiscal prosperity. But at the end of the day everything is relative as to how it affects our personal economies — our motivations are largely controlled by our pocket books. Unless you own substantial stock in ExxonMobil, you cringe hearing the news the company earned $40.6 billion in profits. You cringe again when filling the vehicle at $1.22 per litre or finding the furnace oil receipts left in the mailbox at 95 cents per litre.
There are several reasons for the record high oil prices. Supply and demand is front and centre, with peak oil theories morphing into current estimates of time, population and consumption against world oil reserves. (Google M. King Hubbert for a closer look at this peak oil theory.)
Geopolitics is next. Since the 1970s, for example, there have been three oil crises: the Arab embargo of 1973-74; the Iran-Iraq war in 1979-80 (when crude prices hit the equivalent of paying almost $105 in today’s dollars); and the Iraq invasion of Kuwait in 1990-91. Post 9/11, we have witnessed a steady incline in world prices fuelled by wars, political tensions and hazardous weather affecting output all over the globe.
But what about speculative capital and the energy markets? The New York Mercantile Exchange (NYMEX) began trading oil futures in the mid-1980s. Today, crude is the most actively traded commodity on the planet (for those into speculation and forecasting, crude futures are available for purchase as far out as December 2016).
We are consuming in excess of 80 million barrels of petroleum products per day. Therefore, one of the largest influences on world prices are “risk premiums” attached to contracts. Many analysts acknowledge that market speculation accounts for $15-$25 of the price of every barrel of oil. (The Organization of Petroleum Exporting Countries says it’s closer to $35 .)
If we lived in a world where oil was a normal commodity, competition would dictate that margins hover just above the cost of production, which is estimated between $20-$30 per barrel on average. At the time of writing, oil is trading around $108 with a one-year high forecast of $141. Regardless of the many reasons consumers are given, billions in profits for oil producers are obvious.
So where does it all end? It does appear that we have reached the end of cheap oil and unless markets are flooded with new discoveries, prices will continue the trend upwards in the coming years. In the short term, the U.S. economy is teetering on the edge of recession, though China and India continue their insatiable appetite as developing countries. Additionally, any terrorist attack or new political tensions could further upset the laws of economics. One item of note: U.S. Vice-president Dick Cheney is heading to Saudi Arabia to ask for a significant boost in output. This may ease the markets marginally.
The rest of us, however, don’t buy barrels of crude. Instead, we fuel our vehicles, heat our homes and buy consumables that arrive here primarily by truck. And, boy, do we feel the pain. In fact, I have to fill up my car today — it’s all over but the crying.
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