DEL.ICIO.USQ&A / STUART SCHWEITZER and WILLIAM FISHER
Why is the price of oil so high?Supply, demand, decline of dollar among the factors
The Atlanta Journal-Constitution
Published on: 06/13/08
When gasoline prices first hit $2 a gallon three years ago, drivers gritted their teeth and kept on pumping in the hope that the damage would be temporary.
Now, prices have doubled and the distress shows no sign of disappearing.
 | ||
| THE MARKET PRO: Stuart Schweitzer, managing director and global markets strategist for JPMorgan Private Bank | ||
 | ||
| THE GEOLOGIST: William Fisher, Barrow Chair in Mineral Resources, University of Texas at Austin | ||
|
Worse, the pace of the pain has accelerated: As recently as February, metro Atlanta gasoline averaged less than $3 a gallon.
Why the run-up? Why the recent surge?
One answer is "peak oil." That argument — dismissed a few years ago as alarmist, wacky or worse — now receives a more serious hearing.
The notion is that about half the oil beneath the earth has been extracted. With demand still rising and production at its peak, prices can only keep rising, say peak oil adherents: $4 a gallon will soon seem cheap. But there is a countervailing contention that oil — like the Nasdaq before it — has become something of a "bubble," its prices puffed up by a massive flow of speculation.
The Journal-Constitution recently separately spoke with an expert in the workings of investments and another expert on the geology of fossil fuels.
Q: A decade ago, crude oil was roughly $12 a barrel. Now it is selling for more than 11 times that amount. What is the key reason for the change?
Fisher: The reality is that this is fundamentally a supply-and-demand situation. There is so much growth in demand coming from emerging countries, particularly Asia — especially China and India.
It doesn't take very much in the way of demand to pull it pretty doggone hard.
Schweitzer: It's supply and demand if you look at the growth of oil demand since the mid-1990s. About 75 to 80 percent of the growth has come from developing-market economies. And in the last two years, 100 percent of the growth globally has come from those countries — including, but not at all limited to, China and India. I think the growth of the emerging economies is a secular [long-term] force that will be with us for the foreseeable future, except for temporary interruptions.
Q: Oil prices have nearly doubled in the past year. Even people who said there were fundamental reasons for the price rise were taken aback by the steep, steady climb. What has changed in the past year?
Fisher: I think probably the biggest is the weakening price of the dollar. I've seen some analysis that shows that if the dollar were on a par with the euro, the price of oil would be closer to $70 than to $120 or $130.
Schweitzer: I say supply and demand because supply has proved more restricted than many people expected it would be. There is a very strong case that rapid demand growth has run up against limited supply growth.
Q: How do you judge the action of traders and speculators in oil as a commodity? Are they to blame?
Fisher: There has been some deterioration of the financial situation that has moved a lot of people out of other investments and into commodities. In fact, some of the other commodities have increased even faster than oil. Commodities is a place where a lot of investors turn when there is a softening in other investments.
Really, the effect can be explained by three things: supply and demand, the fall of the dollar and commodity investing.
Schweitzer: Now, I wouldn't want to argue that there is no role for speculation in the rise of oil prices. There may be. But there are good and solid reasons why oil should be up. ... It would not be at all surprising that there was some speculative element to the rise in oil prices. Anytime a commodity is rising, the natural tendency for traders is to try to take advantage of that [which adds to the pressure upward].
But it is very difficult to prove the importance of speculation. I think that it's a story about expectations, that oil prices may go up in the future, and that can itself fuel a further rise in prices.
Q: Have we reached peak oil? Are we close?
Fisher: The idea of peak oil — that we are running out of oil — is not a cogent scientific argument. There are assumptions behind peak oil. You have to know that you are halfway through [all the world's oil]. To know you are halfway, you'd have to know how much oil is out there. And we don't know. The estimates vary by a factor of three.
The resource base around the world is pretty substantial. And how much you are converting to supply depends on the investment made. We know oil is finite. We will peak on oil production one of these days. But that won't be from physical factors. It will be because we are moving to say, a hydrogen economy.
Schweitzer: Non-OPEC supply has leveled off. There has been a decline in places — Mexico, the North Sea — and Russia, too, has had its challenges. Even within OPEC, it's hard to say what limitations OPEC may be encountering.
During the 1980s [after prices rose], demand contracted and prices collapsed. OPEC knows those lessons. I would expect that if it is within their power, they would prefer not to see prices go ever-upward.
The analysis I've seen suggests that ... Saudi Arabia is bringing on a significant new field in a year or so.
Q: What would it take to convince you that you are wrong about peak oil?
Fisher: You'd have to go into a persistent decline of oil production for a couple of years, like the "peakers" say: 6 to 8 percent a year. If I saw that, I'd stand up and salute.
Schweitzer: I think markets work. We have had to adapt. What makes the rise in oil prices so disconcerting is the suddenness, without enough time for people to adapt.
I am not a believer in peak oil. I am a believer in the ability of markets to help the economy to adjust, but that doesn't mean that the adjustment will be painless.
Q: Which is more likely a year from now: oil down $70, to $55 a barrel, or up $70, to $185?
Fisher: Absolutely nobody knows what is going to happen to oil prices. There are so many dependencies out there.
But there are new projects coming that will add 12 to 15 million barrels per day in additional capacity in the next few years. And some will be coming online to increase production in the next five or 10 years.
The amount of new projects coming online should be able to handle demand ... and might even exceed demand — depending on how much [a higher price] dampens demand.
Schweitzer: To my eye, oil prices have now reached levels they are unlikely to hold for the next year. I think that we'll see some pullback in prices.
I think that oil prices have reached a level that will extract more pain than the economy can withstand. We may very well expect a pullback in demand as economic activity slows further.
It's all a matter of degree. I would not expect prices to fall back to the levels of a year ago. I don't expect them to fall sharply.
Unless there comes to be a lot more supply or a lot more conservation — especially in the United States — I just don't see the supply-demand balance improving back to the "good old days" of $60-a-barrel oil.
Vote for this story!
More on ajc.com
- Q&A / STUART SCHWEITZER and WILLIAM FISHER: WHY ARE OIL PRICES SO HIGH? (06/13/2008)
- Oil prices close lower in trading (09/11/2008)
- Change in Ike's path lowers oil (09/10/2008)
- Ike pushes oil prices around (09/09/2008)
- Oil prices plummet on jobs (09/06/2008)
- Oil futures hit 3-month low (08/15/2008)
- Drilling foes trash the planet (07/31/2008)
- OPEC: Supplies will match oil demand (07/10/2008)
- LETTERS: Oil and the energy crisis (06/29/2008)
- Pension funds wind up in oil (06/28/2008)
Inside AJC.COM
Atlanta's best shoe store
Is it therapy to buy a pair of shoes? Discuss ... or nominate your favorite place to find those shoes!
More meat, please
McDonald's has unveiled a line of bigger burgers that will satisfy large appetites and scare cardiologists.
BET Awards
Photos: Janet Jackson, Monica, Maxwell, Jamie Foxx, New Edition, Keri Hilson, Ciara and more!
Private Quarters Splurge
Husband and wife architects created a modern house that's still warm and inviting.
She lost 60 pounds!
"My confidence is through the roof ... I can do anything," says Sonya Moste of Fayetteville.
Ultimate Braves fans
Francoeur's Franks? Shef's Chefs? Just some of the passionate fans who have cheered the team.
Search
Do Good Locally » Find nonprofit causes near you
Services » Find the right people for the job
We want to know what you think
Customer Care »
Vacation stops, manage subscriptions and more
AJC Services
News Sections
Other Editions
Guides
Visitor Agreement | Privacy Statement
© 2009 The Atlanta Journal-Constitution
Comments
By Hugh
Jun 17, 2008 5:01 AM | Link to this
So Mike - you cannot accept that a five fold rise in oil prices in such a short time is entirely supply/demand driven? Well,the rapidly expanding economies of China and India are attempting to provide Western standards of affluence to a third of the entire world population within a very short time frame,and fossil fuels are key to that process.To fully realise that ambition without supply problems would probably require that we double, if not treble the present production of oil virtually overnight. Given that this simply is not going to happen, I would say that constituted reasonable grounds to suppose that a 'demand rapidly outstripping supply'
scenario is entirely plausible,and that talk of things like 'speculative bubbles' are simply Trojan Horses, masking the underlying fact that we are rapidly depleting a finite resource. I would agree with your point that no one knows exactly how much oil is left in the ground. However, does it really matter, when it is patently obvious that we will never be able to extract oil at sufficient rate to keep pace with the ever accelerating world demand? Regardless of whether the oil is in the ground or not, the end result remains the same if it physically cannot be brought to market in time to satisfy world need. ie. you have 'effective' Peak Oil, if not 'actual' Peak Oil. I would say that the 'demand outstripping supply' scenario is a very real presence in our lives.
By Mark
Jun 17, 2008 1:26 AM | Link to this
I think it is time for the goverment to step up and start making hydrogen it's way to get around. It doesn't help that the oil company keeps making record amounts of money and nobody does anything. I guess it helps when the president is in the oil business
By Mark
Jun 17, 2008 1:26 AM | Link to this
I think it is time for the goverment to step up and start making hydrogen it's way to get around. It doesn't help that the oil company keeps making record amounts of money and nobody does anything. I guess it helps when the president is in the oil business
By Mark
Jun 17, 2008 1:24 AM | Link to this
I think it is time for the goverment to step up and start making hydrogen it's way to get around. It doesn't help that the oil company keeps making record amounts of money and nobody does anything. I guess it helps when the president is in the oil business
By rob george
Jun 16, 2008 8:18 AM | Link to this
Oli is very different to other commodities as we now find ourselves in the position of totally depending on it. eg, for agriculture. Almost every new development aimed at improving food production needs more oil and yet it is getting scarce. So its not a matter of just slightly changing direction to adapt to the market conditions. It requires a real paradyme shift in your approach involving for example, changes in the legal structure on land ownership, changes in employement, changes in wages, changes in technology. ie, huge social upheavals, not just a matter of deciding to buy a smaller car.
By Matt Garrison
Jun 16, 2008 12:23 AM | Link to this
Look up the numbers. Do your own calculations. In the words of Albert A. Bartlett, "The greatest shortcoming of the human race is our inability to understand the exponential function." If global oil demand increases by 2.1% each year, then demand will double in 33 years and quadruple in 66 years. Proven global reserves (including suspiciously high numbers from several OPEC countries) were at about 1.3 trillion barrels at the beginning of 2007 according to Oil & Gas journal. Ignoring demand growth and assuming demand stays around 86 million barrels per day, then we have 40 years of the stuff left in proven reserves. Even if we completely ignore growth in demand and assume it stops at present levels around 86 million barrels per day and stays constant forever, and miraculously make some gigantic discoveries that increase proven global reserves to 2 trillion barrels then we only have 65 years of oil supplies left. Unfortunately we haven't made any miraculous oil finds, oil from oil sands is not of high quality and requires a lot of energy to extract, and demand is increasing which will drastically shorten that highly optimistic 65 year figure. Saying that "peak oil is a myth" or a "mere theory" is like saying its a myth that you can't produce an infinite supply of orange juice from a single orange, or claiming that a glass of water with a straw in it will provide a virtually endless supply of water. This isn't politics, this is simple arithmetic combined with the observation that oil is a finite resource. We are not "running out of oil" at the moment but it is not unreasonable to conclude that supply will at best be very tight in the coming years causing ever higher prices before the inevitable decline and depletion of this finite resource. I genuinely hope I am wrong, but it is utter insanity to expect a future of perpetual petroleum supply, or the emergence of a miraculous new energy technology as soon as it is needed. I encourage everyone to look up and crunch the numbers instead of approaching a fundamental resource problem as a political issue. It's not hard to push the buttons on a calculator.
By Joe
Jun 15, 2008 7:03 PM | Link to this
Econ 101- mine theory: as a finite commodity like oil declines in inventory, the price will rise until supply is in equilibrium with demand. The inventory will never reach zero because the price will rise along the way limiting demand/utilization. At some point alternative fuels/energy become competitive with the finite commodity at which point diminishing supply of that commodity becomes a mute point. We will have oil another 1,000 years from now. Wether it will be worth the outragous price many believe it will be in the near future is not as important as how quickly the markets can adapt. I am betting free markets will prevail in the long run- short run spikes have always occured in markets. Remember the gold/silver fiasco's of the early 80's? Everyone believed gold would reach $1000 an ounce and stay there. Hasn't happened yet twenty-five years later. Do you still believe the speculative hype??
By Dubious
Jun 15, 2008 3:41 AM | Link to this
Schweitzer: I am not a believer in Peak Oil.
How can anybody take these so called experts seriously. What is it about the concept of "finite" that Schweitzer can't understand?
You don't have to believe in it, Schweitzer. If you allow that crude is a fossil fuel formed under specific environmental conditions at specific times in the geological past, then 'Peak Oil' is a simple logically impervious statement of fact. The earth revolves around the sun, and at some point in time there will occur a maximum production rate of crude oil. See? Easy when you think about it.
By Dubious
Jun 15, 2008 3:39 AM | Link to this
Schweitzer: I am not a believer in Peak Oil.
How can anybody take these so called experts seriously. What is it about the concept of "finite" that Schweitzer cant understand?
You don't have to believe in it, Schweitzer. If you allow that Oil is a fossil fuel formed under specific environmental conditions at specific times in the geological past, then Peak Oil is simply a logically impervious statement of fact. The earth revolves around the sun and at some point in time there will occur a maximum production rate of crude oil. See? Easy when you think about it.
By Mike
Jun 14, 2008 5:34 AM | Link to this
I agree with John. There will always be "experts" at both ends of the spectrum putting their own personal spin on the direction of oil prices. It does seem a huge coincidence that commodity prices began to rise similtaneously with the end of the tech boom and then another sharp spike after the housing melt down. This would indicate to me a shift in capital flows and one of the major reasons of the dollar continuing to weaken. There is no doubt that Asia has contributed to increased demand for oil in recent years. But is a five fold rise in oil prices in such a short space of time entirely supply and demand driven? I don't think so. One must also consider the reluctance of oil producers to increase supply if they believe the dollar will continue to weaken. As for peak oil, I don't understand why it is being discussed when no one has any idea how much is left in the ground.
[1 2 3 4 5] next
Commenting is open from 8 a.m. to 5 p.m. M-F, except on Tuesday when it's open until 9 p.m.
Post a comment
*HTML not allowed in comments. Your e-mail address is required.
Request a comment be removed