There are a whole bunch of reasons why oil is high at the moment.
Falling US$ (30+% in the last few years)
Various aspects of speculation
'Security' concerns (when has the ME/Nigeria/South America not been a political tinderbox?) - Excess liquidity - Institutional investors trying to recover money lost in the subprime meltdown - etc
Artificially constrained supply.
Nationalisation of various country's (Russia/Indonesia/Nigeria/Venezuela/Brazil/Saudi Arabia etc) oil resources since the 80s...with attendant drops in drilling efficiency in many countries because of a lack of expertise...Indonesia and Venezuela for starters.
The political left/environmental lobby making it impossible for oil companies to build new refineries/drill where they want to increase supply in the last 30 years. No new refineries since 1975 in the US (and many other countries too) and 85% of US continental shelf oil fields and Alaskan oil fields off limits because of the environmental lobby.
Come to that when was the last oil refinery built in Australia?
Consolidation of the US oil industry...read anti competitive, monopolistic practices by the really big US oil companies. They bought out and shut down the 100s of little competitor oil companies that existed in the 20s,30, 40s 50s, 60s, 70s.
Remember when you could buy Amoco petrol, as one example of consolidation reducing competition, in Australia in the 70s?
Lack of funds/desire on the part of oil companies to spend on infrastructure when the price was $12/bbl all through the late 80s and 90s. The modern management practice of manic cost cutting (evident in all businesses in the last decades) is a factor here too. Cost cutting on maintenance, as an example, that BP got stung by last year at Prudo Bay.
The sudden demand for double hulled tankers after the Exxon Valdez spill in Alaska didn't help with infrastructure either...it takes a while to build 1000s of double hulled oil tankers.
Iraq's oil being essentially removed from the world market for an extended period post GW1.
Increased demand
Yes no doubt demand has increased, although now heading south again because of price, especially in India and China but really the world over. Not as much in India and China as the futures traders would have you believe but more than the oil companies could cope with because of the artificially constrained supply side. Read lack of foresight on the part of industry and Govts.
Resource scarcity is not a factor...there is ****LOADS of stuff in the ground. In the ground doesn't help us much though. Having said that there are all sorts of oil projects coming on line in the next little while...Exxon has 20 coming online in the next year alone according to the Exxon CEO.
They are not, btw, looking at $140/bbl and racing out to ramp up oil shale and tar sands hugely either. New projects, from what I have read lately, are price tested at around $70/bbl...if the oil companies are not making a buck or 20 at that price they are not moving a project towards completion.
That is why the 'underlying price' is important.
There are dozens of oil tankers sitting at anchor off refineries chock full of oil that no one wants to buy because of the price..a price largely driven by Futures.
Refineries are running stock holdings down and selling as much refined product as possible at the current high prices and, no doubt, hoping the price retreats, if not crashes, before they are forced to buy the oil in the tankers so they don't get left with huge holdings of expensive oil that just halved in value.
Too the March/April time of year in the US (and it is US demand that drives the Futures Traders/price) is a time of annual reduced demand and refineries reduce production and do some maintenance/change over from primarily heating oil to petrol before demand rises again in the summer so called 'driving season'...although maybe not so much 'driving' this year.
Of course the Futures Traders use falling refinery inventory as an excuse to cry 'PANIC' and bid up the price another $5...just like a gunshot in Nigeria drives it up $3.
OPEC, particularly the Saudis, watch all this and ****loads of other factors besides and see demand falling worldwide at the same time supply is peaking - remember all that oil sat in tankers/new oil coming online?
Far from responding to the political posturing of Bush, Rudd et al to ramp up production they want to restrain it (to avoid another price crash like the 80s when oil went from $100+/bbl [inflation corrected] to $12) but can't because the Futures Traders will scream "Peak Oil-the Saudis are really running out" and the price will go through the roof.
OPEC and the big oil producers like Exxon are sat on the edge of their seats at the moment waiting for the crash they know is coming and that they are almost powerless to stop.
Non of the above is to minimise the incredible problem that $140/bbl presents our industry and the wider economy...it is a REALLY big deal and we will almost certainly see recession as a result...but recession is NOT the end of the world.
Last edited by Chimbu chuckles; 9th Jun 2008 at 13:25.