“The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually,” according to a mid-March Federal Reserve System press release.
The release first hands out the positive news and then cautions the reader, “Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.”
Crude oil prices have been rising rapidly, with the WTI-Cushing Oklahoma spot price having jumped from $97.23 on March 15 to $104.53 by March 22, while the Europe Brent spot price rose from $111.11 to $115.63 respectively.
Many theories are expounded by experts, with some claiming that unrest in the Middle East with the associated political instability is affecting the rise and fall of oil prices, while others put the blame squarely on economic factors, natural disasters, and last but not least, the unorthodox trading practices by big-time oil traders.
“Oil markets run wild. Big traders are making a record bet that crude prices, up 26% over the past year, will rise further as unrest rattles the Middle East,” according to a posting on the Energy Bulletin of the post carbon institute website.
Although this writer qualifies his statement by saying that the rise in oil prices is not due to irresponsible gambling by oil traders, an Internet search indicates that irresponsible trading practices have not been put to rest.
The article suggests that the culprit of rising oil prices is energy demand by the world’s people. What comes into play is the economic theory of supply and demand, that is, when supply decreases and demand goes up, the prices will inevitably move upward.
On the other hand, the U.S. Energy Information Administration (EIA) blames the natural disaster in Japan and political upheaval in the Middle East for the most recent oil price increases.
“The recent supply disruption in Libya and the subsequent near-term disruption of oil demand in Japan have sent crude oil prices on a roller coaster,” states an EIA March 23 press release.
The release goes on to say that the day when the Libyan protests peaked, the Brent spot price reached $103 per barrel of oil. Just 16 days later, the Brent reached $117 a barrel, and then when the news about the Japanese natural disaster hit the airwaves, it dropped to $111 a barrel.
Wake-Up Call Concerning High Oil Prices
“Oil prices swung wildly this week, rising to near 30-month highs. ... The ride is not over yet. … There may be ups and downs, but long term, high oil prices are here to stay,” predict analysts and professors in a Knowledge@Wharton (KW) March article. KW is a publishing arm of the University of Pennsylvania.
Among others, natural catastrophes, political turmoil, the economic theory of supply and demand, negative media coverage about dwindling supplies, and possible further disruptions are the main drivers of crude oil prices.
Different influencing factors may have opposite effects on oil prices, taking them for a roller coaster ride. Japan’s catastrophe had a downward effect on oil prices because the market expects, given the damaged oil refineries, a much lower Japanese demand for crude oil, lowering the price. Then, shortly after, Bahrain demonstrations drove crude oil prices up, because the world sees Saudi Arabia surrounded by countries experiencing political unrest. So, the guessing game is on among experts, and no one is really sure what the future brings.
A detrimental effect could be the fear of nuclear power plants, given Japan’s disaster. “Longer term, a backlash against nuclear energy—in Japan and beyond—could drive oil prices back up again,” KW speculates.
As the economic revival is still rather fragile, speculations come into play, and the KW article suggests that a spike in crude oil prices could reverse the upturn. Such increases would result in rising gasoline and heating oil prices, putting stress on individual households to meet everyday living costs. Companies would have to lay off people to meet rising energy costs, affecting the unemployment lines.
However, the professors are upbeat and consider the above no more than assumptions and possibilities. But, at the same time, they are speculating that if Saudi Arabia is hit by an economic disaster, the economic recovery will take a dive.
Also, the U.S. economy is less energy dependent than years ago, suggesting that energy for production purposes has decreased by half, as the majority of U.S. manufacturing has been outsourced to foreign shores, and the remainder has become much more energy efficient.
Additionally, renewable energy products are curtailing the need for oil derivatives.
“We’re closer to alternative sources of energy for our transportation, which would be accelerated if oil really moved up,” said Jeremy Siegel, professor at Wharton Business School, in the KW article.
The professors are very cautious in their predictions of possible future oil price jumps. They suggest that an increase from $98 a barrel as the steady future price, to $200, could only happen if Saudi Arabia were to experience a political upheaval.
“We’re all focused on the Middle East and North Africa, but a lot of the same conditions exist in Equatorial Guinea, Angola and Nigeria. I’m not saying they’re going to go like dominoes, but it takes uncertainty about [just] one of them to create a real problem,” said Witold Henisz, professor at Wharton and oil company initiative expert, in the KW article.
Oil Running Economy of World’s Largest Oil Exporters
“Saudi Arabia has one-fifth of the world’s proven oil reserves [approximately 260 billion barrels in 2010], and maintains the world’s largest oil production capacity,” according to the EIA website.
The United States, European, and Asian nations consider Saudi Arabia their main oil supplier, and any disruption would negatively affect the economies of many nations.
Saudi Aramco, which is owned by the Saudis, has a mission to explore for more oil reserves, though their luck seems to have run out lately, because of very little new oil field discoveries. Without oil exports, Saudi Arabia’s earnings from crude oil sales would be affected, as it contributes close to 90 percent of that country’s revenues.
Saudi Arabia was recently outpaced by Venezuela, whose president announced at the beginning of 2011 that their proven reserves reached 297 billion barrels, and they are now the country with the largest crude oil reserves.
Libya’s earnings from hydrocarbon exports reached 95 percent in 2011, and this country is known to hold approximately 46 billion barrels of oil, the largest oil reserves in Africa. It is ranked ninth in the world with regard to proven oil reserves.
While Saudi Arabia’s explorations are coming up dry, analysts suggest that Libya still has large amounts of undiscovered oil fields and might surprise the world’s oil experts in the long run.
The United States has 21 billion barrels of proven oil reserves as of 2011, a smidgen when compared to Saudi Arabia.
