Economics Blog

The question many have asked over the last few weeks is whether oil prices will fall ever, and if so when? The latest move up was pretty much in the span of a few hours, when from about $132/bbl, prices shot up to nearly $139/bbl, with many scratching their heads as to what could have possibly happened to warrant such a move. Then, as the newswires reported, Libya’s oil chief said that they could possibly cut output, and in the face of already tight supplies failing to match demand, this resulted in prices shooting up. Ghanem was reported as studying the possibility of reducing Libyan oil output, following a bill passed by the US House of Representatives allowing the Justice Department to sue members of OPEC for limiting oil supplies and working together to set crude prices! Whether such a vague statement justified a $6-$7 move up is, of course, a completely different question. All said, the market is nervous and any comments signalling supply shortages or rising demand will only make situations worse.

Then came the whole Israel-Iran row. Israel, celebrating it’s 60th anniversary of its foundation, claimed that an attack on Iran’s nuclear installations was unavoidable and apparently practised for it. Then, last weekend, Iran’s foreign minister claimed that he did not believe that Israel was in a position to “engage in such adventurism” and attack his country, as Israel was still dealing with the consequences of its war with the Hezbollah. Heightening rhetorics between the two reached a new height, when a senior Iranian military official is believed to have said that Iran is digging 320,000 graves for their enemies, should they be attacked. Eventually what really shook the market was Iran threatening to impose controls on shipping in the Gulf Straits of Hormuz, which accounts for nearly 40% of the world’s traded oil flows, if it was attacked and warned regional states of reprisals if they participated in any attack against their country. While the US has, of course, criticised these comments and have stressed on the importance of dialogue to solve the issue, the oil market has taken no notice of that.

While crude fell from its record highs late Friday and over the weekend as Iran said it gave a ‘constructive’ response to incentives intended to persuade the nation to stop uranium enrichment, thus slightly allaying concerns of an immediate attack, prices nonetheless stay at record levels. In an environment where non-OPEC supply is continuing to fall (Russian production fell for the 6th consecutive month in June) and growth of oil supply from outside the OPEC countries looking more and more grim going forward as well (IEA’s Medium Term Oil Market Report points to only a 1.2 million barrels per day of non-OPEC supply growth in oil till 2013), one wonders whether irresponsible statements by government officials heightening tensions in the Middle East is what the market requires at the moment. Lately, many have pointed to ’speculators’ and ‘investors’ as the key factors for driving oil prices up. I think we should perhaps shift gears and have a look at politicians having a significant impact in creating unnecessary jitters in the market, thereby resulting in record oil prices for days.

Tags: Hezbollah, IEA, Iran, Israel, Libya, oil, OPEC, Russia, speculators

This entry was posted on Sunday, July 6th, 2008 at 4:17 pm and is filed under Commodities, Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.