In his “Semiannual Monetary Policy Report to the Congress” before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, last week, chairman of the Federal Reserve Ben Bernanke explained why oil prices are so high and are likely to stay that way for the foreseeable future:
The spot price of West Texas intermediate crude oil soared about 60 percent in 2007 and, thus far this year, has climbed an additional 50 percent or so. The price of oil currently stands at about five times its level toward the beginning of this decade. Our best judgment is that this surge in prices has been driven predominantly by strong growth in underlying demand and tight supply conditions in global oil markets. Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil. Moreover, growth has been concentrated in developing and emerging market economies, where energy consumption has been further stimulated by rapid industrialization and by government subsidies that hold down the price of energy faced by ultimate users.
On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.
Much of the subdued supply response reflects inadequate investment and production shortfalls in politically volatile regions where large portions of the world’s oil reserves are located. Additionally, many governments have been tightening their control over oil resources, impeding foreign investment and hindering efforts to boost capacity and production. Finally, sustainable rates of production in some of the more secure and accessible oil fields, such as those in the North Sea, have been declining. In view of these factors, estimates of long-term oil supplies have been marked down in recent months. Long-dated oil futures prices have risen along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to come.
The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. The precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and supply of oil, have been the principal drivers of the increase in prices.
Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. Certainly, investor interest in oil and other commodities has increased substantially of late. However, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year. This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term.
This isn’t some short-term speculation-driven problem. It is long-term fundamentals. Americans need to brace themselves for tight oil markets years to come.
Related Posts:
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- Peak Oil? Bring it on!
- $12 – $15 gas? Not so fast. But we’ll soon be mad for $6 – $7
- Note to media/Bush: Saudis/OPEC don’t control the price of oil any more!
- Peak-a-boo: Goldman says oil ‘likely’ to hit $150-$200 by 2010. That means $5+ gasoline.
- Note to Bush, media: Opening ANWR cuts gas prices one penny in 2025
- IEA warns of impending oil and gas supply crunch
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- My 1996 warnings and predictions: “MidEast Oil Forever?” — Part I: Drifting Toward Disaster
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This highlights something that my fellow lefties have been doing that drives me nuts: Jumping on the “it’s all the speculators’ fault!!!” bandwagon. That’s every bit as wrong as the righties blabbing about “achieving energy independence” or how opening up offshore US areas to drilling will dramatically lower gasoline prices.
I’ve been saying for a long time that we can’t afford to pick just one monster under our bed to worry about–peak oil or global warming. They’re both here, they’re both extremely serious problems, and action on both will require fighting some very well funded deniers (often the same people, not surprisingly).
Lou, I notice the world oil price dropped more than $10 in a consecutive five day period.
was it due to the Chinese government clearing the roads around Bejing of any vehicles.
Lets not blame it all on the speculators! Just try to explain a doubling in oil price being caused by (what?) doublind demand, or was it Nigeria? or was it NASCAR…or was it greed or was it the huge hedge and pension funds jumping on the commodities roller coaster when they cashed in their financials indexes and shares?
How much blame should we attribute to the speculators and can I get some of that money back? They did not earn it. I did.
Lets talk short term and not tie the doubling in price to peak oil and AGW. I agree they are monsters in the closet but they are relatively quiet compared to the floor action at the comodities exchanges lately.
John McCormick
How do you explain the price difference between diesel and gas but the presence of a substitute good (ethanol). As soon as the CTL comes on line (four years to quadruple ethanol in USA) price destruction.
How to help curb CO2 and make money…speculate on oil and gas!
Why this post on this blog? What is the relevance to climate change?
> What is the relevance to climate change?
1) Burning fossil fuel is one cause of global warming
2) The predicted continuing high price of said fossil fuel can be a very significant determinant of how willing people are to entertain other options for energy/transportation.
This bank chap doesn´t notice that oil is going to be used only some twenty years more. What is the price of the last oil drops? Some 1000 $ per barrel?
Jorleh, as substitute goods are created to replace fossil oil,(what was an old saddle horse worth in 1939 after grandpa bought his model A car?) the ‘natural’ oil will actually loose value. the synthetic oil will end up much cheaper than oil at minus 20,000 feet. Industrial synthetic diamonds are now sold for a few dollars a carat now for example.
Peter, what will this “synthetic oil” be made from?
Coal, plant matter, compressed CO2 and water, shale, GM oil seed crops, and tar sands. What ever is cheapest. At 50 cents, oops 40 cents a pound fossil oil can be economically replaced by many substitute goods.