Oil Price Defies Easy Calculation
Friday, April 11, 2008
Is there a fair price for oil?
It doesn't seem that way. Over the past year, the price of crude oil has nearly doubled even though oil inventories are ample, there has been no disruption in supplies, and petroleum demand in the United States, the world's biggest consumer, has leveled off in recent weeks as the economy has slowed.
"There may be [a fair price] but it would be difficult to get consumers and producers to ever agree on it," said Guy F. Caruso, administrator of the Energy Department's Energy Information Administration (EIA). "Ideally, if there was a more competitive market, we might find out. But it's not the world we're living in today."
That's been evident this week. On the eve of the summer driving season, crude prices defy gravity, hovering around $110 a barrel, keeping gasoline prices at record levels and sapping money from cash-strapped consumers. Yesterday, the AAA auto club said prices at the pump set records of $3.357 a gallon for regular unleaded gasoline and $4.045 for diesel, even though U.S. gasoline consumption fell 0.6 percent in the first quarter.
That could make oil prices a politically volatile issue this year among voters who think prices are excessive and are looking for someone to blame. Yesterday, Sen. John McCain (Ariz.), the presumptive Republican presidential nominee, backed Sen. Byron L. Dorgan (D-N.D.) in calling on the Bush administration to suspend additions to the Strategic Petroleum Reserve, which is currently taking about 70,000 barrels a day of high-quality crude oil off the market. The two rivals for the Democratic nomination, Sens. Hillary Rodham Clinton (N.Y.) and Barack Obama (Ill.), had already endorsed Dorgan's proposal.
That would help, oil experts say, but it would be a drop in the bucket in a world where consumers use about 87.5 million barrels a day.
If consumers are baffled by the rising prices, so are many oil experts. "The fundamentals are no problem," Jeroen van der Veer, chief executive of Royal Dutch Shell, said in a recent interview. "They are the same as they were when oil was selling for $60 a barrel, which is in itself quite a unique phenomenon." He blamed the lack of spare oil production and refining capacity, and tensions in the Middle East, for keeping prices high.
Yesterday, Citigroup became the latest bank to raise its oil price forecasts, upping its estimate of the full-year average for 2008 by 20 percent, to $96 a barrel, and boosting its 2009 estimate by 17 percent, to $88 a barrel. When the U.S. economy is weak, banks generally lower their expectations for oil prices.
"There is no question that the continued strength in oil prices continues to challenge perceptions of what constitutes a 'sustainable' level," Citigroup oil analyst Doug Leggate said in a report. "The oil price outlook arguably remains more subjective than ever and hence leaves any long-term oil price assertion equally subjective and somewhat irrespective of traditional 'fundamental' analysis."
Many oil experts point to big hedge funds, investment managers and pension funds, which are pouring money into commodity markets.
The custodians of California's main public-employee pension fund, CalPERS, decided in December to more than double the amount of money invested in a commodity index fund, to $1 billion this spring. Though that's a small portion of the fund's assets, the figure is still significant; by 2010, the fund could boost its commodity stake to as much as $7 billion. The fund said that about 65 percent of those holdings would be in energy.
"It is the vision of our chief investment officer, Russell Read, who believes that in the coming decades natural resources are going to be where the action is," said Clark McKinley, a CalPERS spokesman.