The Causes of Soaring Oil Prices: Industry Analyst Views
Interviews with oil industry analysts
Multinational Monitor: Would you attribute the recent oil price spikes more to supply and demand fundamentals, concerns about Middle Eastern instability, speculation or other factors?
Bob Tippee, editor, Oil and Gas Journal: I would say that 80 percent is fundamental supply and demand tightness. Ten percent is concern about the Middle East and other geopolitical tensions. Five percent is speculation and 5 percent would be other things like the weak dollar.
Jeff Rubin, chief economist and chief strategist, CIBC World Markets: Certainly not Middle Eastern instability or speculation or so-called geopolitical factors. While that's a convenient watch-word to attribute all of this to, the simple fact of the matter is if there was hoarding--which one would consider in geopolitical terms because people are afraid of supply disruptions--there would be large inventories of oil. But quite the contrary, inventories of oil are at record lows.
The story now is how many OPEC countries are cannibalizing their own export capacity. By that I mean that an alarmingly increasing percentage of their oil production is now going to meeting domestic demand as opposed to world export markets. And that reflects to a considerable extent the policies of massively subsidized oil prices in those countries, resulting in soaring demand growth there.
Philip Verleger, president, PKVerleger LLC: Most of it is due to the DOE [Department of Energy]. Speculation didn't play a part. Start from the fact that we have just seen [in the Fall of 2007] in absolute terms, the largest price increase in history, which I find stunning. It's the largest price increase over a 90-day period. It's larger than the price increase we saw when Iraq invaded Iran in 1980. Larger than the price increase we saw when Iraq invaded Kuwait in 1990. That's stunning. What happened? You look across international lines--nothing happened. And if you look at oil prices last year versus this year, they were about identical up until August 18. The path was about the same, and suddenly they went way up this year versus going down last year. And the one real change was DOE decided to put oil in the Strategic Petroleum Reserve [a U.S. government-operated reserve pool of oil, maintained in case of a national security emergency].
Adam Sieminski, chief energy economist, Deutsche Bank: The market is in a sense testing what level the prices have to go to before we can get some supply response and some reduction in demand. So far, what we are finding is that even at $3 gasoline, there is still a pretty good appetite in the United States for buying gasoline and cars. So the price keeps going up and it might keep going up until we finally get to the point where somebody says, "You know, at that price level I think I'm going to get a smaller car."
There were five huge things that have happened over the course of the past few years that have driven prices very high. The first is China and India emerging as big consumers of everything, including oil. And, a very strong demand base in the United States. So that's the first thing: China, India and the U.S. as big consumers.
The second thing was underinvestment in new production and refining capacity. We had a period not too long ago, just 10 years ago, when oil was $10. Everybody thought the prices would keep going down, so there was not a lot of investment in new production and refining. By the early part of this decade, that underinvestment began to haunt us.
The third thing is we've had rising geopolitical risk. We've had problems in places like Iran, Iraq, Nigeria, Venezuela, even Russia, you could argue. There have been issues that have come up over the past few years that have tended to constrain oil production.
The fourth thing has been the decline in the dollar and very low interest rates. Low interest rates promote capital investment and growth, and the falling U. …