World oil prices are bouncing between $125 and $127 a barrel, shrugging off Saudi Arabia's pledge to add an additional 300,000 barrels to...
WASHINGTON — World oil prices are bouncing between $125 and $127 a barrel, shrugging off Saudi Arabia’s pledge to add an additional 300,000 barrels to global supplies. Are these once unthinkable prices a high-water point or just another pause on an upward march?
No one knows for sure. Experts argue forcefully for a fallback or a continued rise. Here are some answers to questions about what comes next for rising oil and gasoline prices.
Q: Some analysts predict $200-a-barrel prices. Is this really possible?
A: Investment bank Goldman Sachs recently grabbed headlines with a research note that examined that possibility. In March 2005, Goldman suggested oil could pass $100 a barrel and, while criticized at the time, its call now seems prophetic.
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Goldman on March 16 forecast an average oil price of $141 a barrel for the second half of 2008; the $200-a-barrel number reflected a “super spike” if supplies are disrupted.
If oil prices stay around today’s levels, world economic growth remains solid, and the U.S. economy begins rebounding in the second half of 2008. That would make it likely that oil prices, and thus gasoline prices, would go even higher.
Oil jumped 76 cents Monday to settle at a record $127.05 a barrel on the New York Mercantile Exchange.
“If we got back on a fast global growth track, that would put additional pressure into an oil market where new capacity is being delayed, postponed, not developed,” said Daniel Yergin, an oil historian who brought “The Prize,” a Pulitzer-winning book about oil’s rise, to economic prominence.
Yergin recently published a report that outlined how prices could climb in the range of $150 to $200.
“We could imagine today that you could see oil rise if the dollar continued to weaken; in the very near term oil could spike higher,” he said.
Q: If oil prices rose high enough, wouldn’t that lead to less consumption, more supply and lower prices?
A: That’s the definition of demand destruction, where prices rise to an unsustainable level and fall back. It seemed we were there at $90 a barrel, $100 a barrel and so on. The U.S. Energy Information Administration and the Paris-based International Energy Agency both have revised downward their forecasts for oil demand this year in the United States and globally.
“The important point is it is still demand growth,” said John Felmy, chief economist for the American Petroleum Institute. Even with falling demand, global oil use is expected to grow this year by 1 million to 1.2 million barrels per day.
Q: Are the fundamentals of supply and demand in play or are these high prices the result of speculation?
A: Let’s first break out the supply-and-demand issues.
Clearly, there are underlying problems of supply. Production is flat in Russia, the world’s second-ranked oil giant after Saudi Arabia. Civil unrest in Nigeria is knocking out about 1 million barrels per day.
Iraq has never returned to prewar production levels and remains far from its capacity. Increasingly belligerent Venezuela has seen production fall and Mexico seems unable to reverse a production decline.
On the demand side, the global economy seems to have shrugged off the U.S. downturn, and China and the Middle East are each gobbling up about a third of new oil production for their fast-growing economies.
Both China and oil-rich Middle Eastern economies subsidize gasoline prices and to some extent electricity rates. This removes price signals for consumers that otherwise would bring about more conservation.
The earthquake in China is likely to increase the need for oil, both for reconstruction and for power needs as the electrical grid in southwest China has been severely damaged.
Japan is also weighing on the demand side, consuming at least 200,000 barrels a day more than it otherwise would have after a decision to close some nuclear reactors.
Because of variables on both the supply and demand side, it’s easy to see why investors nervous about the stock market or a falling U.S. dollar would see a safer bet on oil prices going even higher.
Q: So it’s all supply and demand and not speculation?
A: That question is hotly debated. The Commodities Futures Trading Commission, which regulates the trading of contracts for future delivery of oil — called futures — believes big pension funds and other institutional investors may accentuate a trend but are not the cause of high prices.
“If the fundamentals weren’t strong, you couldn’t play on the margin [speculate] in any event,” said Frank Verrastro, director of energy programs for the policy research group Center for Strategic and International Studies.
Others, including U.S. Sen. Carl Levin, D-Mich., believe the so-called Enron Loophole is to blame. This is a legislative loophole won by the now-defunct energy giant in 2000 that removed from regulation the electronic trading of oil futures by large traders.
Some experts believe oil traders are pushing trades into less regulated overseas markets where they can build up higher concentrations in their investments and escape direct scrutiny by U.S. regulators.
These big positions can move markets. Exhibit 1 is the spectacular 2006 crash of Amaranth Advisers, a hedge fund that pooled investments from ultra-wealthy investors to take huge positions in futures contracts for natural gas. In doing so, it drove up the price for Americans of heating and cooling their homes.
Last summer, federal regulators, well after the fact, accused Amaranth of manipulating prices and fined it almost $300 million.
Q: What’s being done about this loophole?
A: A farm bill passed by the Senate last week by a veto-proof margin includes a provision to close this loophole and bring greater record keeping and scrutiny to electronic trading of oil futures.
Democratic presidential candidates Barack Obama and Hillary Rodham Clinton want the loophole closed. A top adviser to GOP candidate John McCain said the candidate has no position on the issue.
The Enron Loophole came to be thanks to the efforts in 2000 by Texas GOP Sen. Phil Gramm, who today is McCain’s closest economic adviser and close personal friend. Gramm’s wife, Wendy, was once the top U.S. commodities regulator and an Enron’s board member.