The volatility of global stock markets has seemingly worn down
speculators' patience, as they shift to the oil markets which look
more alluring against the backdrop of a falling greenback.
Admittedly, there is a persistent rise in global oil demand, but
it is unreasonable to solely blame the market for the "oil bubble"
as described by many veteran oil analysts. It should be noted that
there are other "invisible hands" behind the crazy oil prices.
US crude surged to a record US$98.62 on November 7 before
retreating on profit takings. Since mid-August, oil prices have
swelled about 40 percent because of the anaemic dollar, robust
global demand and diminishing inventory levels, which have summoned
huge speculative investment estimated to be equivalent to one
billion barrels under futures contracts.
Institutional investors such as hedging funds joined the rally
to further drive up global oil prices. These speculative investors,
who do not need oil themselves, pocketed substantive profits in
recent price rises, said analysts.
To prop up oil prices, suppliers deliberately cut their output.
According to the Washington Post, countries rich in oil had
not been fully exploiting their reserves. The newspaper said Iraq
was producing almost 2 million barrels a day less than its 1970s
peak. Production had declined for various reasons in Venezuela,
Nigeria, Mexico, the United Arab Emirates, around the Caspian Sea
and elsewhere.
Saudi Arabia and Kuwait trimmed production a year ago to drive
up then-sagging oil prices at US$55 to 60 a barrel. Saudi output
had been running about half a million barrels a day lower than last
year, said the newspaper, citing the International Energy
Agency.
The weak dollar poured oil on the flames. The difference between
the sagging dollar and the strong euro had caused an imbalance of
foreign earnings and spending for oil producers and increased their
domestic inflationary risks.
Developing countries like China are paying much of the
skyrocketing prices as imports account for about 50 percent of the
nation's oil consumption.
Faced with worsening fuel shortages in the country, China raised
petrol, diesel and jet fuels prices by nearly 10 percent to boost
domestic supplies but its wholesale petrol prices are still lower
than the international average. (about US$76 a barrel compared with
the international average of US$102)
This means the Chinese government has to continue offering large
amount of subsidies to refineries to cover losses they incur by
selling oil at state-set prices. The government subsidized Sinopec,
the nation's largest refinery company, to the tune of US$1.2
billion in 2005 and US$640 million in 2006.
In the meantime, soaring oil prices add to the financial burden
for enterprises and individuals, and likewise increase inflationary
risks. In fact, oil crises have caused at least two global economic
downturns, one in 1973 and the other in 1979.
China has been touted as the new engine of the world economy.
Therefore, if the engine fails because of high oil prices, the
global economy might stall along with it.
Despite a temporary fall on Thursday after US Federal Reserve
Chairman Ben Bernanke highlighted the dual threats of slower growth
and inflation for the US economy, US crude Friday regained some of
the ground as worries that supplies may come up short ahead of the
Northern Hemisphere winter prompted fresh buying in crude oil
futures.
Irresponsible speculative investing is threatening global
economic security and its effect will linger on until the global
oil market restores its own pricing abilities on a rough balance
between supply and demand.
In history, there was no bubble that never burst, be it stock or
oil prices. Oppenheimer and Sons analyst Fadel Gheit held that oil
was US$30 a barrel overpriced. Oil share experts are studying to
what extent company profits would be affected by possible oil price
falls.
One thing for sure is that irrational oil price rises will
dampen the outlook for the global economy. And that, in turn, may
yet make the bubble makers pay for what they have done.
(Xinhua News Agency November 13, 2007)
