All is well with oil prices

1. “All is Well” with Oil Prices
Muzahid Khan-R250207023
Masters in Business Administration (Integrated BBA-O&G), Sem-VII
University of Petroleum & Energy Studies, Dehradun, India.
Oil prices today could no longer justify the traditional demand-supply relationship. Nor does it
comply with the theory of marginal economies anymore. The contemporary Peak Oil theories continued to
be a subject of debate in itself. Rather, crude oil prices today are believed to be controlled by an elaborate
financial market system, where more than sixty percent of the prevailing oil prices are the result of pure
speculation carried out by large trader banks and hedge funds.
These speculators are neither the producers nor the consumers but they still risk their money in
trading huge oil futures to make some profit out of the fluctuating oil prices. Due to excess investments in
the futures it pushes up the spot prices of oil which of course but affects the producers as well as the
consumers.
However it was not always the same. The need to control oil prices was felt long ago with rising
strategic importance of crude oil post World War I, which soon became the object of geopolitical
confrontations between the oil producing and oil consuming nations, and there by left oil prices on a never
ending turbulence.
To harness the price of this valuable resource, the first oligopolistic commercial control in the oil
market was exercised in 1928 by the achnacarry agreements between the „seven sisters‟ (oil majors of that
time), followed by the nationalization trend in early 1930‟s in the developing countries which sowed the
seeds of future Oil Shocks gradually disrupting the market fundamentals. OPEC was formed in 1960 to
stabilize the prices by setting production quotas which too did not worked well for long. With the
emergence of oil futures trading and the two major London and New York oil futures contracts, control of
oil prices has left OPEC and moved to Wall Street.
But the process by which oil prices are really determined today is so opaque that only a handful of
major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who
is selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper
oil.”
The price is at the mercy of the market, capitulated to the impulse of speculating traders and hedge
fund managers who are vehemently restless due to an increasingly imaginative assortment of externalities
such as production shutdowns in Iraqi civil war, Nigeria, Iran, and Hurricanes or indeed any other
perceived risk. It is something like selling roses where every day is Valentine‟s Day.
The present day oil market is full of conspiracy as well as being equally omniscient and
calculating machine. A more revealing way to look at it is as a game of poker played by producers,
consumers, and investors. No one can see the cards, so there is a lot of bluffing and intimidation. There
comes a time—and we could well be there now—when no one believes anyone else. The outlook for
supply and demand at the moment is particularly opaque; many oil traders don‟t know what to think,
which is the main reason for the prices being so jittery.
“So what is true price of one barrel of oil?” Is oil really black gold or is it made into precious
commodity by cartels of oil producing countries? To a common man all that is a black box, who somehow
predicts oil prices to be in certain way and soothes himself by crying out….
“All is Well with Oil Prices”.
References: Cassidy, John, Economics Black Hole, Aug 13, 2008; Whipple, Tom, The Peak Oil Crisis: July 2008; McKinlay,
Steve, Oil price out of control as worlds pumps at capacity, 27 April 2006; Engdahl, F William, Geopolitics-Geoeconomics, 2 May
2008; History of Illinois basin posted crude oil prices.
Internet Resources: Wikipedia, Price of Petroleum; About.com, US Economy-Kimberley Amadeo; wikinalysis.com, oil prices;
compareboker.com/blog-Neel Garg.