If you want a first-hand demonstration of the idea that supply issues are only part of what is causing the price of oil to rise, then today is the perfect day for a lesson.
First, we have the announcement from the Saudi King that the Kingdom of Saudi Arabia would pump more oil:
Saudi Arabia will raise oil production to record levels within weeks in an attempt to avert an escalation of social and political unrest around the world. King Abdullah signalled the commitment to the UN secretary general, Ban Ki-moon, at the weekend after the impact of skyrocketing oil prices on food sparked protests and riots from Spain to South Korea.
Next month, the Saudis will be pumping an extra half-a-million barrels of oil a day compared to last month, bringing total Saudi production to 9.7 million barrels a day, their highest ever level. But the world’s biggest oil exporters are coupling the increase with an appeal to western Europe to cut fuel taxes to lower the price of petrol to consumers.
And how do the oil futures markets react to this news ?
They reach yet another record high:
Oil futures are hitting a new milestone near $140 a barrel, a dramatic surge analysts attributed to the weakening dollar. The surge comes even despite expectations that Saudi Arabia, the world’s biggest oil exporter, was planning to increase its output by about a half-million barrels a day.
Light, sweet crude for July delivery rose to a trading record of $139.89 a barrel Monday, but retreated slightly to trade up $3.45 at $138.31 a barrel on the New York Mercantile Exchange.
The dollar fell on a weak report on New York state manufacturing activity, analysts said. Many investors buy commodities like oil as a hedge against inflation when the dollar falls. Also, a weaker dollar makes oil less expensive to investors dealing in other currencies.
Many analysts believe the dollar’s protracted decline is a major factor behind oil’s doubling in price over the last year.
Gee, do you think ?
June 16th, 2008 at 3:25 pm
A lot of this is due to uncertainty over KSA reserves, I think. Good piece today over at The Oil Drum on this very topic:
Saudi Arabia’s Crude Oil Reserves: Particulars or Propaganda?
http://www.theoildrum.com/node/4153
Executive Summary
1. Saudi Aramco has effectively used propaganda methods for at least the last fifteen years to convince many governments, corporations and individuals to believe their statements. However, Aramco’s statement that it is the world’s leading oil producer is now false as it now second after Russia since 2006. Nevertheless, Saudi Aramco’s repeated statement about remaining recoverable oil reserves being 260 billion barrels (Gb) is still generally accepted.
2. In 2004, Saudi Aramco stated that its oil initially in place (OIIP) has been growing steadily since 1982. There is considerable doubt about the validity of this increase, given the lack of new oil discoveries and the unusual nature of its steady continuous increase. Aramco stated the OIIP was 700 Gb at year end 2003 while a more realistic estimate is 580 Gb.
3. Aramco may have some high recovery factor fields such as Abqaiq and Shaybah, but an average recovery factor range from 30-37% is assumed for the total OIIP in Saudi Arabia’s fields. The trend of the recovery factor for Saudi Aramco indicates that there has been no effect on the recovery factor by recent technological advances in producing wells. Saudi Aramco has kept remaining recoverable crude oil reserves constant simply by artificially increasing the OIIP each year since 1982, accompanied by an unrealistically high average recovery factor of 52% since 1988.
4. Saudi Aramco’s propaganda campaign is failing. Saudi Aramco is no longer the world’s leading crude oil producer. Saudi Aramco’s statement of 260 billion barrels of remaining recoverable reserves is almost certainly false. Instead, the remaining recoverable crude oil reserves are probably less than 100 Gb, instead of 260 Gb. It is time to call on Saudi Aramco and the other OPEC members to tell the truth about their reserves.
June 16th, 2008 at 3:28 pm
Saying that you will pump more, and actually pumping more, are two different things. Also, a half million barrels a day doesn’t do much to offset the declining output from the North Sea and PEMEX.
The speculators are betting that he can’t do it, and even if he can it won’t matter much.