Oil: Welcome move by Saudi Arabia
Thursday, June 12, 2008
WHATEVER the logic behind skyrocketing oil prices especially over the last three years, sentiment seems to have played a large part in driving this voracious bull market. Whether it is, index speculators causing or chasing prices up or whether market manipulators were involved, current prices are not justified by fundamentals. The Organisation of Oil Exporting Countries (Opec) had previously refused to increase output adding further fuel to sentiment. However, the world's top producer Saudi Arabia on Tuesday called for a meeting with consuming nations in the wake of soaring prices reiterating its readiness to meet any increase in demand.
Saudi Arabia had announced last month that it would boost supply by 300,000 barrels per day. On Tuesday, the Saudi Cabinet chaired by King Abdullah said, "Saudi Arabia ... has notified oil companies with which it does business, as well as consumer nations, of its readiness to provide them with any additional quantities of oil they need." The Saudi cabinet said current prices "are not justified by the reality of the oil sector or market fundamentals". And yesterday Kuwait and Iran joined Saudi Arabia in slashing the price of crude exports to the deepest levels in at least nine years.
This should put a lid on rising prices and soon moderate them to more sensible levels. Oil prices which had hit a record US$138.54 ($189.87) last Friday receded to just over US$133 yesterday.
Oil companies had rejected any role in the crisis of upward spiralling saying they only controlled 10 per cent of production while producing countries were responsible for the other 90 per cent. Oil producers and companies had also cut back on exploration activities after the price collapse of the 1997/98 brought prices to below cost of production resulting in many marginal wells shutting down. Drilling technology has also lagged as a result and the number of oil professionals have also fallen sharply. Moreover, the cost of exploratory drilling has doubled in the last few years. Industry sources say it would take about two years from construction to delivery to bring drilling platforms to location. Nevertheless, the current stratospheric prices is bound to be an incentive to renew exploration.
High oil prices while boosting the revenues of producing nations and companies have at the same time caused a lot of suffering in poor nations and contributed to rising food prices besides diverting of food grain to biofuel. This has caused food riots in poor nations as well as protests in countries which cut fuel subsidies or have fuel sales tax including many Asean countries and India.
There have also been crippling strikes in European nations. According to a Reuters report yesterday Lisbon's main airport had run out of fuel because of a strike by truck drivers, causing flight delays but no cancellations. The report quoted a spokesman for Portugal's airport authority as saying, "There are no (fuel) supplies for airplanes at Portela airport, only for emergency, military and state flights."
Caught in the middle are index speculators who reportedly raised their profile in the futures market from US$13 billion in 2003 to US$260 billion this year. They face a real risk of getting mauled when the market crests and falls. And there have been huge crashes from the collapse of the dot.com bubble on the US Nasdaq in 2001 after a heady drive into the clouds from 1995 to the recent collapse of the US sub-prime market which badly burned a lot of respectable major banks when the slide came.
The year 2008 seems very likely to become a watershed year for fossil oil sparking a dedicated drive among its dependent industries to look for alternative fuels especially those which don't produce harmful emissions that can further contribute to global warming — now become a mattter of the urmost urgency. There is already a fast rising demand for hybrid vehicles "which offer the best fuel economy of any car on the market by combining an efficient gasoline engine with an electric motor and batteries that are constantly recharged". Waiting in the wings are hydrogen powered and electric cars besides vehicles which run on water. When their time comes and it will, though many years may elapse in between, then instead of burning away fossil fuel, it can be diverted to the production of polymers which have wide uses and which can be recycled.
Saudi Arabia had announced last month that it would boost supply by 300,000 barrels per day. On Tuesday, the Saudi Cabinet chaired by King Abdullah said, "Saudi Arabia ... has notified oil companies with which it does business, as well as consumer nations, of its readiness to provide them with any additional quantities of oil they need." The Saudi cabinet said current prices "are not justified by the reality of the oil sector or market fundamentals". And yesterday Kuwait and Iran joined Saudi Arabia in slashing the price of crude exports to the deepest levels in at least nine years.
This should put a lid on rising prices and soon moderate them to more sensible levels. Oil prices which had hit a record US$138.54 ($189.87) last Friday receded to just over US$133 yesterday.
Oil companies had rejected any role in the crisis of upward spiralling saying they only controlled 10 per cent of production while producing countries were responsible for the other 90 per cent. Oil producers and companies had also cut back on exploration activities after the price collapse of the 1997/98 brought prices to below cost of production resulting in many marginal wells shutting down. Drilling technology has also lagged as a result and the number of oil professionals have also fallen sharply. Moreover, the cost of exploratory drilling has doubled in the last few years. Industry sources say it would take about two years from construction to delivery to bring drilling platforms to location. Nevertheless, the current stratospheric prices is bound to be an incentive to renew exploration.
High oil prices while boosting the revenues of producing nations and companies have at the same time caused a lot of suffering in poor nations and contributed to rising food prices besides diverting of food grain to biofuel. This has caused food riots in poor nations as well as protests in countries which cut fuel subsidies or have fuel sales tax including many Asean countries and India.
There have also been crippling strikes in European nations. According to a Reuters report yesterday Lisbon's main airport had run out of fuel because of a strike by truck drivers, causing flight delays but no cancellations. The report quoted a spokesman for Portugal's airport authority as saying, "There are no (fuel) supplies for airplanes at Portela airport, only for emergency, military and state flights."
Caught in the middle are index speculators who reportedly raised their profile in the futures market from US$13 billion in 2003 to US$260 billion this year. They face a real risk of getting mauled when the market crests and falls. And there have been huge crashes from the collapse of the dot.com bubble on the US Nasdaq in 2001 after a heady drive into the clouds from 1995 to the recent collapse of the US sub-prime market which badly burned a lot of respectable major banks when the slide came.
The year 2008 seems very likely to become a watershed year for fossil oil sparking a dedicated drive among its dependent industries to look for alternative fuels especially those which don't produce harmful emissions that can further contribute to global warming — now become a mattter of the urmost urgency. There is already a fast rising demand for hybrid vehicles "which offer the best fuel economy of any car on the market by combining an efficient gasoline engine with an electric motor and batteries that are constantly recharged". Waiting in the wings are hydrogen powered and electric cars besides vehicles which run on water. When their time comes and it will, though many years may elapse in between, then instead of burning away fossil fuel, it can be diverted to the production of polymers which have wide uses and which can be recycled.
Business Besides Oil
