Oil is now trading at $130 per barrel. There is a hearing in US to pinpoint the cause of the high price of oil. Yesterday night at 11pm almost every single gas station in Singapore increased their pump prices. My colleagues complain everyday during lunch about their petrol bills.
So far the fingers are pointing everywhere:
1. OPEC - did not increase production as demand rises.
2. Oil Companies - did not increase production.
3. China + India contributed to rise in demand.
4. USA did not tax oil prices enough to curb demand. In Europe the taxes are much higher.
6. Subsidies in various countries like Malaysia keeps the pump prices artifically low hence demand remain high in those countries.
Who is guilty? Why is oil trading at $130 and not $60?
The demand for oil is relatively inelastic in developed countries. You drive your car to work so if petrol prices rises by 10%, you still go to work by car. The demand remains about the same regardless of price so is the supply. Supply is close to capacity. There is also no shortage of oil, nowhere in the world are there reports of people queuing up for limited amounts of oil.
When it comes to rising oil prices, subsidy plays an important role in the rise. In countries like Indonesia and Malaysia, petrol is subsidised. This means the govt foots the bill as oil price increases and the drivers pay a low subsidised rate that they can afford. If there is no subsidy in developing countries, the demand will fall alot further because the income level is low and rising oil price will make it unaffordable causing demand to fall. In Singapore, petrol is still a small component of household spending, so the impact of higher prices is limited.
Are speculators to be blamed? Is there a bubble in oil?
Speculators are out to make money and many simply follow trends in price movements. The fact is at $130 per barrel, there has been no significant change in the demand or supply....so the speculators are saying "why not?"...lets push it higher and see what happens. $130 is suppose to hurt enough for consumers to change their habits but they still haven't due to subsidies in developing countries and high income in developed countries.
The good news is the Indonesian and Malaysian govts have announced that they "tak buleh tahan" the price increase and will slash subsidies. The Saudis will increase production slightly and the US will stop topping its strategic reserves. More govts are looking at the high price of oil as an important issue that has to be tackled and they are starting to be pro-active.
At $130, the total value of OPEC's known reserves is worth US$137 trillion. This means the OPEC nations have more than the total financial assets of the rest of world...the Chinese with all their success being the "workshop of the world" has only $1 trillion in reserves. I'm very sure OPEC nations will be very eager to encash all this selling at today's prices....so supply isn't going to fall even if oil price falls to $80 per barrel.
What is needed for oil prices to fall is a slight shift in the demand downwards, this will cause the inventories to buildup as OPEC maintains its production levels and speculators seeing there is no meat left in the oil rally start to sell. This will result in oil prices going down to a "reasonable" level below $100 per barrel.
Despite the reports we see frequently in the papers today about ever rising oil prices and analyst predictions that it will hit $200 per barrel, I believe oil prices will cool off soon.