By Steven Mufson
Washington Post Staff Writer
Thursday, May 22, 2008
Confused about oil prices? So are the experts.
Executives from the giant oil companies say it's partly the fault of "speculators" or financial players. Key financial players say it's really a question of limited supply and expanding global demand. Some members of Congress accuse the Organization of the Petroleum Exporting Countries for bottling up some of its production capacity. And OPEC blames speculators, wasteful U.S. consumers and feckless U.S. policy.
Almost everyone points at China's growing appetite for fuel.
Whatever the causes, one of the most dizzying runs in the history of oil prices picked up pace yesterday -- again -- as crude oil prices jumped to settle at more than $133 a barrel, up $4.19 in one day, 18 percent so far this month and more than one-third so far this year. Prices climbed even higher in late electronic trading.
The nationwide average price for a gallon of regular gasoline yesterday also set another record at $3.81 a gallon, up a penny a day for the past month, the auto club AAA reported.
"People don't get it," said Sen. Herb Kohl (D-Wis.) at a Judiciary Committee hearing yesterday at which senior oil company executives were grilled about prices. Kohl said: "Demand is not crazy. Why are prices going crazy?"
While the share of blame for soaring oil prices may be blurry, the impact of those rising prices is painfully clear. They are damaging the profits of oil-intensive industries, tearing holes in the pockets of American consumers, offsetting the stimulant effect of tax breaks, sapping more than $1.5 billion a day out of the U.S. economy for oil imports and diverting ever-bigger gushers of dollars to oil-producing countries such as Saudi Arabia, Russia, Iran and Venezuela.
Analysts cited several factors behind yesterday's crude oil move: the declining dollar, the impact of higher price forecasts issued by investment banks, an unexpected drop in U.S. crude inventories and a jump in Chinese fuel imports. China needs extra fuel to run generators to compensate for disruptions in coal deliveries and hydropower resulting from the recent earthquake. Traders said demand is particularly strong for diesel fuel, used by drivers in Europe and in Chinese generators.
But the bigger question is: What has been driving the doubling of prices over the past year even as U.S. demand has stagnated and global output has continued without any major new disruption?
"The basic story that has brought oil from $20 to $130 dollars is that world demand is growing robustly when world supply is not," argued Jeffrey Rubin, chief economist of CIBC World Markets. "As a result, we need ever-higher world oil prices to kill demand in the [industrialized countries], which is exactly what's happening."
While U.S. demand has leveled off, Rubin said, demand in China is growing at a 12 percent rate, more than the 8 percent rate he forecast. While the extra increase in China is probably because of short-term factors, such as the earthquake or hoarding by the government in preparation for the Olympics, Rubin said even the lower rate would keep world demand growing briskly.
Earlier this month, Goldman Sachs rattled the market by upping its second-half 2008 forecast for oil prices to $141 a barrel from $107. And it said prices could spike as high as $200 a barrel.
"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."