All eyes are on the world’s oil market, with prices threatening once again to find a new high. The immediate cause for increased attention is a spike in oil prices since the beginning of the year. With that 20 per cent rise taking Brent crude to $128 a barrel in early March 2012, there are fears that the price of oil may soon touch the peak $140-a-barrel it had reached in July 2008. The IMF’s Managing Director, Christine Lagarde, has declared that rising oil prices were now a bigger global worry than the debt crisis in Europe. Ali Naimi, Saudi Arabia’s oil minister also stoked fears rather than assuaging them when he said that Saudi Arabia was willing to ramp up its production to the tune of 25 per cent to bring down the “unjustified”, high price of oil.
The source for these fears is not jut the 2012 price spike but the standoff between Iran and the West, ostensibly over the former’s nuclear programme. Through that the developed countries are contributing to speculation in oil markets. Iran, which is third largest net exporter of oil, is already subject to US sanctions that are targeted at limiting its oil exports. To add, Europe announced that it would also impose an embargo on oil imports from Iran starting July this year, and Iran responded by threatening to immediately cut supplies to six European countries. These developments came in the aftermath of the uncertainty resulting from political developments within the region. Ever since the outbreak of diverse oppositional movements in West Asia and North Africa, uncertainty with regard to supplies has been on the rise. The political disruption in Libya in particular was seen as having had an adverse effect on supplies. So the potential sanction were seen as inevitably leading to a price spike
But, in practice, all these developments have not upset the demand-supply balance in oil markets, They have only affected market sentiment and encourage the speculator. In fact, from a purely demand-supply point of view, the 2012 rise in prices is indeed surprising. The US, the world’s largest importer, has seen its import levels drop significantly in recent times. The combination of a recession and higher oil prices has reduced oil demand in the US by 2 per cent last year. In addition domestic supply in the US has improved, partly because of increased domestic production and partly because of the availability of alternative fuels such as ethanol. As a result the share of imports in US oil consumption was down to 45 per cent from 60 per cent in 2005. Aggregate US imports of crude oil are placed at 8.91 million barrels a day in 2011, which was the lowest it has reached after 1999. Even in China and India, the second and fourth largest net importers of oil, growth has slowed after the crisis. So demand from those sources too would have been lower than would have otherwise been the case. All this should have worked to moderate international oil prices. Even Naimi said that his production enhancement threat was meant to “dispel this pessimism in the market”, since “high prices are unjustified today on a supply-demand basis”.
If prices have risen sharply despite these trends, it appears to be the result of speculation riding on adverse market sentiment. Armed with the cheap liquidity made available in response to the crisis, traders have been working markets of various kinds for profit. It has been known for some time now and reported by diverse sources that investors in search of investment targets have moved into speculative investments in commodities in general and oil in particular. They have in particular played havoc through trades outside official exchanges, such as over-the-counter trades conducted by oil companies, commercial oil brokers or funds held by investment banks. The result is the price spike hat has little to do with supply and demand.
In sum, a combination of political uncertainty, partly generated and sustained by US and European foreign policy, and the operations of global finance, is taking the world into a higher oil price regime. The result could be a deepening the crisis in the global economy.
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