Peak Oil News: What is driving oil prices so high?

Sunday, April 23, 2006

What is driving oil prices so high?


Crude oil prices have surged to record levels of over $72 a barrel - a rise of more than 18% in 2006, and a threefold gain over the past three years.

The effect is to heighten fears about inflation in importing countries - and to exacerbate international tensions.

The price of US-traded light, sweet crude hit a record of $72.40 on 19 April, while UK-traded Brent crude from the North Sea has raced to an all-time high of $74.

BBC News looks at the factors that are driving oil prices higher.


The biggest catalyst for oil's seemingly remorseless rise in recent years has been the simplest economic driver there is: the balance between demand and a supply.

For starters, oil demand is at an all-time high.

The big change has been the continued breakneck economic expansion of the developing world's biggest economies, India and China.

With more than a billion people each, and sustained annual growth rates of 7% in India and 9% in China, manufacturers and consumers are sucking in energy at an ever-increasing rate.

But on top of that, there is little sign that demand from industrialised countries is flagging. In the US in particular, the gas-guzzling Sports Utility Vehicle (SUV) still dominates the car market. Economic growth rates, already strong in the US, are likely to pick up in Europe this year.

Oil producers' group Opec says demand is up a million barrels a day over the past year - a little more than 1%.

But some projections suggest that over the next quarter of a century, demand could soar from the current 90 million barrels a day to as much as 140 million.


More recently, though, security threats to the world oil supply have risen up the agenda.

Predictions that Iraq's oil production would increase dramatically following the US-led invasion of Iraq have proved over-optimistic due to the deteriorating security situation in that country.

Nigeria, another key member of oil producers' group Opec, has its own security problems. Much of its oil comes from the Niger Delta region, and local activists demanding a bigger share of revenues have repeatedly shut down production, invaded platforms and refineries, and even taken foreign workers hostage.

Now, though, it is Iran, another of the world's biggest oil producers, which dominates the headlines.

The country's push to acquire nuclear power and, many believe, nuclear weapons has sparked concern in the international community - and raised the spectre that Iran could use its own oil supplies as a bargaining chip at best and a weapon at worst.

And barely-veiled threats from the US suggesting that military action remains a live option have further accentuated fears.


The reason the security concerns play directly onto oil prices is that they threaten supply and roil the oil markets.

But more general supply trends play their own part in pushing up prices.

Big oil companies are having a harder and harder time replenishing their reserves, and must look further afield and in more hard-to-reach locations.

At the same time, calls for more efficient use of resources and better returns for shareholders has led them to run down stocks - and push the construction of new refineries down their agenda.

The result has been to tighten supply just as demand has soared.

A more controversial concern is the so-called "peak oil" theory: the idea that the world has reached the natural limits of oil exploitation, and that there is little more to be found in the ground whatever the price.

Although many in the business dismiss the concept, energy planners in several countries are nonetheless beginning to take it into account.


Most of the headlines about oil prices look at the issue from the consumption perspective: the pain which high energy costs is causing.

But on the other side of the fence, producers are having a wonderful time.

In South America, for instance, oil revenues are underpinning President Hugo Chavez's efforts to reshape Venezuela, allowing him to fund extensive social programmes and reject US criticism of his economic policies.

Opec, the source of about a third of the world's oil, has a theoretical target price of about $30 a barrel for oil - but Mr Chavez thinks his fellow member states should push that up to $50.

And apart from Saudi Arabia, which remains by far the world's biggest supplier, few in Opec have either much of a stomach for increasing production - or much capacity to spare.

Meanwhile, outside Opec, Russia's oil and gas bonanza has underwritten efforts by President Vladimir Putin to centralise and even renationalise the country's energy sector.

And several African countries are riding high on oil demand.

The tiny states of Equatorial Guinea and Sao Tome & Principe are high on the list of popular destinations for oil firms these days - although their populations seem unlikely to see the kind of benefits that many Venezuelans are now enjoying.


At 5:26 PM, April 23, 2006, Anonymous Anonymous said...

While this article comes across as having covered the issue comprehensively and that is certainly the aim there is a glaring omission.

The mechanism which perhaps is the most direct and least hypothetical of all the proposed reasons for the price rise, even more so than tightening supply, is the massive amount of speculative investment in the oil commodity market that has taken place of late.

At 9:42 AM, April 25, 2006, Anonymous Anonymous said...

Can anyone tell me why the amount of taxes we pay in every gallon of gas is never discussed in high oil prices? It seemst to me that the easiest way to cut oil prices is to cut oil taxes, rather than mess with the market.


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