Washington, D.C. In a span of just ten months, the price of petroleum doubled from $50 to $100 per barrel. This volatility threatens rational policy-making for all participants in the market--producers, importers, refiners, retailers, and consumers. Nobody has as yet come up with a clear answer to the question why oil and gas prices have become so volatile, may climb even higher and exert an increasingly negative effect upon the world economy.
In the long term, the world’s supplies of petroleum are bound to decline and run out altogether unless other sources of energy take its place so that demand can be effectively reduced. In the short term, there is no hard evidence that oil is in tight supply in the Oil Exporting Countries (OPEC). Non-OPEC supply growth has been disappointing, however, and spare capacity worldwide has been reported to have decreased from more than 6 million barrels per day (bpd) in 2002 to around 2 million bpd at present. In the meantime, demand for oil worldwide has continued to increase.
Sometimes political developments in oil-producing regions are temporarily impacting upon oil prices far more than supply problem--when, for example, American or Israeli leaders threaten to attack targets in Iran, when President Bush raises the specter of World War III, when President Musharraf imposes martial law in Pakistan, or when students in oil-exporting Venezuela demonstrate against President Chavez. Potentially alarming geopolitical scares are frequent but rarely have they led to as much price volatility as now.
Ironically, as the oil price rose, demand and income growth have not declined. It seems consumers continue to expect a major price correction just around the corner.
According to the International Energy Agency (IEA), "The staggering pace of Chinese and Indian economic growth in the past few years, outstripping that of all other major countries, has sharply increased their energy needs, a growing share of which has to be imported." China’s and India’s economies--each serving more than one billion people--and the Persian Gulf economies significantly complement each other. Income growth in the Gulf region will not only raise demand for imports from India and China but also increase Gulf investment in those countries.
In spite of economic growth and corresponding demand for oil and gas in Asia and Europe, however, America’s disproportionately high energy consumption still exerts the biggest impact upon the supply and the price of fossil fuels worldwide. Americans urgently need to ask themselves how much longer they can afford higher gas prices in view of their record levels of private and public indebtedness and the weakened dollar. And how much longer can Americans afford not to downsize their uncontrolled demand for oil and gas? U.S. refinery stocks have decreased since the summer, but it is not at all clear whether this is due to scarcity of oil or to deliberate financial considerations.
Whether consumers like it or not, the ultimate power to
set the price of any scarce commodity is wielded by the producers. For oil and gas, it is the OPEC members who determine prices through their control of supply to the market. According to IEA experts, the mere suggestion by OPEC that it may increase supply by 0.5 million barrels could arrest the price climb and cause a drop of $2 per barrel. That’s the extent to which the oil producers have the oil consumers “over the barrel.”
Last week’s third OPEC summit in Riyadh seemed to counteract the price volatility in oil and gas when it reaffirmed its commitment “to conserve, efficiently manage and prolong the exploitation of their exhaustible petroleum resources, in order to promote the sustainable development and the welfare of future generations.” The OPEC leaders also stressed that they are aware of their responsibility for “global energy market stability and economic prosperity.”