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Skyrocketing Oil Prices Stump Experts
"The market is once again searching for a new equilibrium," Goldman said in a May 16 analysis. It said that policy constraints were impeding the flow of capital, labor and technology, limiting new supplies despite high oil prices, while demand remained stubbornly strong. Higher exploration costs have also blunted activity to boost supplies. As a result, Goldman said, even higher prices would be needed to bring demand growth in line with supply trends.
Oil consumers usually react slowly to price increases; savings come as they buy more fuel-efficient cars.
But another reason high prices haven't had a bigger effect on consumption is that much of the world isn't paying market price. "Half the world is not seeing the real oil price," said Rob J. Routs, executive director for oil products and chemicals at Royal Dutch Shell.
This year, for example, India is expected to pay more than $20 billion in fuel subsidies. According to the International Monetary Fund, Lebanon, Mexico and Peru have cut excise taxes, and the Philippines and Ukraine have lowered import duties to blunt price increases -- much as Sens. Hillary Clinton (D-N.Y.) and John McCain (R-Ariz.) have proposed a tax "holiday" for U.S. motorists.
Oil-producing countries are among the worst culprits; their consumption has rivaled China's. CIBC's Rubin said Mexico, the second-leading source of U.S. oil imports last year, could be a net oil importer in five years.
But even the oil industry and financial community are divided over the cause of high oil prices. "There's nobody waiting at retail stations to fill up cars," said Routs, who points to financial flows. "There's no problem getting crude to refineries."
"The high is developing a momentum of its own," said a pair of analysts at Commerzbank in Frankfurt, Germany. Bloomberg News reported that they said "the trend will soon be coming to an end, and that the subsequent correction will be all the more severe."
"We see many of the essential ingredients for a classic asset bubble," said Edward Morse, chief energy economist at Lehman Brothers. Morse estimated that $90 billion has flowed into the biggest commodity indices in just more than two years, and more money has flowed into other exchanges, pushing up prices.
"Performance-chasing financial inflows to commodities cause prices to rise, thus delivering good performance and, in turn, attracting even more inflows. This phenomenon can be self-fulfilling," Morse said. Ultimately, however, "commodities markets still have a physical aspect to them that must fundamentally balance." He said that once the size of oil inventories and worldwide spare production capacity becomes clearer, "markets may face a sharp correction."