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The abrupt rise in oil prices in the past can be attributed to supply crisis caused by politics, whereas the current oil price rally is more a "demand crisis". Though the supply constraints still exist due to changing political scenario globally, the oil demand is outpacing the supply. Eventually, the rising oil prices have occupied the top position in the list of major impediments to the global economy.
Among
the foremost factors causing the current oil shock are the
burgeoning demand from "Chindia" (China and India)
as well as from the US, and shortage of refining capacity
in the US and Europe. Besides, the speculative investments
in commodities, especially oil, are pushing the prices northwards.
Alarmingly, the speculative investments in commodities have
reached $100 bn. Alexander Wostmann, Founder, Alexander's
Gas & Oil Connections, says, "The `Market', whatever
this may be, is concentrating huge amounts of money to profit
from the price rises they cause themselves due to `fears'
for possible happenings that might eventually disrupt supply
that are broadly ventilated to the masses via the media, therefore,
making `understandable' that the prices need to rise".
Though futures markets are essential for locking the risks
associated with rising oil prices and assuring supplies, many
blame commodity speculators for much of the recent oil price
escalation. But speculators believe that prices are rising
due to possible future disruptions in the supply side.
Saudi
Arabia, being the largest oil producer, has come to the rescue
during previous oil price shocks by increasing capacity and
production. But this time, the situation is difficult as there
is no spare capacity to meet the growing demand. The present
supply shortfall is not because of running out of oil; rather,
it is the producers who have not kept pace with the growing
demand for oil. Since decades, the entire world has ignored
the supply ceilings by OPEC. Moreover, OPEC has been creating
artificial supply constraints instead of making adequate investments
to enhance production. For the past two decades, the industry
has witnessed underinvestment in its entire value chain. Hence,
any distraction in one part of the value chain is likely to
cause oil price spike. |
