OIL: Speculation Drives Prices Through the Roof

By Humberto Márquez Reprint | | Print |

Humberto Márquez

CARACAS, Aug 12 2005 (IPS) - Oil prices hit a new record of 66.69 dollars a barrel in New York Friday, driven up by sustained demand, refinery problems, a drop in gasoline stocks in the United States, geopolitical tension and speculative activity, according to a report by Venezuela’s Energy Ministry.

U.S. benchmark West Texas Intermediate (WTI) closed Friday at 66.55 dollars a barrel, after climbing to a high of 66.69 dollars – up 75 cents from Thursday.

London Brent crude also hit a new high of 65.88 dollars a barrel.

The weekly averages were 64 dollars for WTI, 63.02 for Brent, and 56.78 dollars for the OPEC (Organisation of Petroleum Exporting Countries) basket of 11 benchmark crudes, according to the Caracas report.

This week’s prices were three dollars higher than a week ago, six dollars higher than a month ago, 15 dollars higher than in the first quarter of 2005, 25 dollars up from the 2004 average, and more than double the prices of two years ago.

But adjusting for inflation, they are still below the post-Iranian revolution prices of 1979, when they soared to more than 40 dollars a barrel, equivalent to 80 dollars a barrel today.

Iran, OPEC’s second largest exporter – after Saudi Arabia – again indirectly contributed to this week’s price rise due to concern sparked by its clash with the European Union and the United States over its nuclear programme.

But Seth Kleinman, an analyst with U.S.-based PFC Energy, said prices were expected to hit 70 dollars a barrel sooner rather than later.

Venezuelan President Hugo Chávez, who signed oil cooperation deals this week with Argentina, Brazil and Uruguay, remarked that "oil prices will continue rising because the reserves are running out, on one hand, and there are factors like the war in Iraq on the other."

"The United States’ plans didn’t work out. They had hoped that by now they would have had Iraq under control, and be producing three million barrels a day, but they haven’t been able to get the country under control," said Chávez.

Iraq is pumping less than two million barrels a day, and like the rest of the OPEC members, as well as the non-OPEC producers, it is producing at near capacity, in order to meet the current global demand of 84 million barrels a day.

OPEC, which produces nearly 40 percent of the world’s oil and accounts for around 55 percent of total shipments, is made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Driving the steady high demand for oil is economic growth in the United States and in emerging giants like China and India. But prices are rising because of fears in the U.S. and other markets of possible gasoline shortages due to problems in refineries.

For example, ConocoPhillips, the largest U.S. oil refiner, suffered a power failure and fire Wednesday in its Wood River refinery in Illinois.

Although the 306,000 barrels a day processed by the plant is a small amount in comparison to the total U.S. gasoline consumption of 9.5 million barrels a day, the partial shutdown came on top of an Energy Department report that gasoline inventories had shrunk in the last week from 205.2 to 203.1 million barrels.

In the face of possible gasoline shortages and higher prices in the United States – the retail price currently averages 2.37 dollars a gallon – traders are seeking to stock up on oil supplies and thus push up demand and prices.

"Speculation now adds between 18 and 20 dollars to the price of each barrel," Venezuelan oil expert Mahzar al Shereidah commented to IPS.

Speculative transactions are based on levels of inventories, refining capacity and demand in markets like the United States, as well as weather reports on the hurricane season affecting oil-producing areas in the Gulf of Mexico, and above all, the situation in the Middle East.

This week, Iran became a cause of market jitters, while last week concern rose after the United States warned of the possibility of terrorist attacks in Saudi Arabia, which pumps 9.5 million barrels a day of crude, making it the world’s top producer.

"There are many geopolitical risks, yet there is no slack in the system to handle any disruptions," said Tony Nunan, manager for energy risk management at Mitsubishi Corporation in Tokyo.

For small consumer nations like those of Central America, today’s huge oil bills are a heavy burden on their economies.

This year, Nicaragua will pay some 520 million dollars, 95 million more than in 2004, for the 10.5 million barrels it imports, while El Salvador will spend 900 million dollars to import the same quantity of oil that it purchased last year for 670 million dollars.