Oil Jitters Shake Industry: Sharp Fluctuations in the Price of Petroleum-The World's Most Actively Traded Commodity-Have a Significant Impact upon Global Trade and Importing-Countries' Trade Balances. Is the Price of Oil about to Go through the Roof Again?
Siddiqi, Moin, African Business
Oil markets are influenced by host of variables--notably global economic cycles; seasonal demand in the industrialised northern hemisphere; weather patterns; geopolitical developments in the Middle East and North Africa (which possess almost three-quarters of world's proven oil reserves equivalent to 746.8bn barrels); and the Organisation of Petroleum Exporting Countries (Opec) output and pricing policies.
It was a commonly held view that once the security threat posed by Iraq was dealt with--by a US and UK invasion that would effect regime change--the world's oil markets would stabilise, and the price of oil would fall.
But one year on from that invasion, consumers in both wealthy and poorer countries are still facing soaring energy costs. By mid-March, crude oil on the New York market peaked at a 13-year high of $38.5 a barrel.
The Western media often presents Opec's image as being the major factor behind high oil prices. The 11-member cartel has enforced a strong production discipline in recent years in order to protect revenues, and finance capital investment as well as socio-economic projects.
Between 2000 and March 2004, Brent blend--which is the industry's global benchmark--has averaged $27.7 a barrel, up from $17.8 over 1996-1999. But it would be unfair to blame higher oil prices solely on Opec's pricing policies.
Contrary to accusations that Opec was restraining production to inflate the oil price, the cartel was pumping at near full-capacity (28m b/d) in March. Meanwhile, non- Opec supplies, led by Russia, Africa and Mexico, were expected to raise production by another 1.35m b/d during 2004.
Why is oil so costly when global production is running at near record highs? A combination of factors have been underpinning energy prices, for several months, including an expanding world economy which is pushing up the demand for energy. Projections for 2004 oil demand growth range from Opec's 1.45m b/d to the International Energy Agency 1.65m b/d, which would be a marked recovery on 2002's anaemic 400,000 b/d rise.
Crude usage is strongest in China and the US. China, now the world's second-largest oil importer after the US, is expected to consume 6m b/d this year, according to IEA.
Low stockpiles are also contributing to market volatility. Depleted inventories of petrol, diesel and jet fuel, particularly in the US which consumes about 20m b/d, is a further factor that keeps the price of oil high.
The Organisation for Economic Cooperation and Development's (OECD) industry stocks, last March, totalled about 2.5bn barrels, representing 51 days of forward-consumption, down from the 60 days' demand-cover of mid-1990s.
There are also serious concerns that the US, accounting for 40% of worldwide fuel consumption, may be unable to replenish its petroleum stocks ahead of the summer 'driving season'--when US citizens use their cars to take their vacations.
The falling value of the US dollar must also be taken into consideration. As the currency in which practically all of the world's oil is traded, the greenback's fall against the world's major currencies has reduced the value of every dollar of oil receipts by 20% during the past two years. Presently, the Brent price in euro terms is 25.8 against a dollar price of $31.75--based on a euro-dollar exchange rate of $1.23 on April 1.
Oil-exporters justify higher prices to offset lower purchasing power in European Union (EU) countries and Japan. Hawkish Opec members, led by Venezuela and Nigeria, have been calling on the cartel for an increase in the Opec price band--from a $22-$28 spread to a $25-$32 spread.
CALL FOR HIGHER PRICES
Edmund Daukoru, energy adviser to Nigerian President Olusegun Obasanjo, explains why: "Changes to the band are needed because of a new equilibrium emerging over the past few months. …