First Review of The Century

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First Review of The Century

Post  Chew Kor Lin on Tue Jul 01, 2008 8:40 pm

What is driving oil prices so high?

Oil prices have hit a record high at $100 a barrel.

Prices have doubled from the rates seen in January 2007 and more than quadrupled since 2002.

What factors are causing this unremitting increase and what are the likely consequences for consumers and the global economy?


What is causing the latest price spike?

This was triggered by concerns about violence in Nigeria and Algeria as well as the delay of the elections in Pakistan.

The assassination of the former Pakistani Prime Minister Benazir Bhutto increased oil prices because stability in Pakistan is important to US policy in the Middle East.

Threats to oil workers and facilities in Nigeria have cast a long-term shadow over oil supplies from the world's eighth largest oil exporter.

Suspected militant attacks on Wednesday in Nigeria's main oil city, Port Harcourt, heightened concern over the potential for further disruptions in shipments.

"With the military and the militant warlords engaged in a violent tit-for-tat, the risk for oil disruptions in Nigeria remains higher than in the past few months," said Olivier Jakob of Petromatrix.

The weak dollar, which makes it cheaper for importers to buy dollar-denominated oil supplies, is also a major factor.

Is demand for oil continuing to soar?

Yes. The biggest catalyst for oil's seemingly remorseless rise has been the simplest economic driver there is: the balance between demand and supply.

Demand is at an all-time high, fuelled by the continued breakneck economic expansion of the Indian and Chinese economies.

With more than a billion people in each country, and both economies growing fast, manufacturers and consumers are sucking in energy at an ever-increasing rate.

China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing at about 15% a year.

Analysts worry global demand for oil is so intense that supplies may not keep pace.

Demand will rise by an average of 2.2 million barrels a day next year, the International Energy Agency says, compared with the 1.5 million-barrel rise seen in 2007.

It says annual demand will rise 2% up to 2012, while other projections suggest demand could soar from about 90 million barrels a day to as much as 140 million over 25 years.

What is Opec doing about the situation?

As the leading oil supplier in the world, producers' cartel Opec is under constant pressure to do something about the price bubble.

It recently bowed to pressure to pump more oil, agreeing to raise its production quotas by 500,000 barrels a day from 1 November.

Reports suggest the move was forced through by Saudi Arabia and that few other Opec members either have much stomach for increasing output or much capacity to spare.

Opec has said the market is "very well supplied" with crude and will continue to be so in the immediate future.

It has blamed speculation by market traders - who can make money by betting on the future direction of prices - for the continuing price rises.

Critics of Opec say it must act more aggressively to bring prices down.

"The response from Opec has been pretty poor so far," says John Roberts, an energy security analyst with commodities research firm Platt's.

"The sentiment in the market is that it is time for Opec to increase production again."

Who are the winners and losers from costly oil?

Taking inflation into account, prices are still below levels seen in late 1980, when a barrel of oil - in today's prices - was worth more than $101.

Back then, costly oil helped contribute to a recession in the US and similar fears are resurfacing now.

The Bush administration has said it is "very concerned" about current price levels, at a time when the economy is already expected to slow significantly next year.

High energy prices make life more expensive for consumers and businesses, having an knock-on effect on their spending in other areas.

Gasoline prices are hovering not far below the $3-a-gallon mark in the US, while UK petrol retailers have warned prices could soon rise above 1 a litre.

But on the other side of the fence, oil giants such as ExxonMobil and BP are having a wonderful time, while oil-rich countries are also smiling.

Oil wealth has underpinned President Hugo Chavez's efforts to reshape Venezuela, allowing him to fund extensive social programmes and reject US criticism of his policies.

Russia's oil and gas bonanza has underwritten efforts by President Vladimir Putin to exert state control over the country's energy sector.

Where will prices head next?

Many people scoffed when analysts from investment bank Goldman Sachs said in 2005 that prices could eventually top $100 a barrel.

"All of the factors that pushed us above $80 are now moving us higher," said Peter Beutel at Cameron Hanover in Connecticut.

"Until we get more supply or demand starts to take a hit, there is no reason we can't see any number."



Firstly, the author mentioned that delay of the elections in Pakistan is causing the prices of oil to rise. The assassination of the former Pakistani Prime Minister Benazir Bhutto increased oil prices because stability in Pakistan is important to US policy in the Middle East. I agree to this point as with the weakened stability in Pakistan will occupy the US, US will have less or even no time to think of policies to help curb the surge in oil prices. US being one of the major economy in the world, its absence in playing a role in controlling the oil prices will definitely allow oil prices to rise unstoppably to a certain extent. However, i will have to say that this reason cannot be the sole facotr causing the surge in the oil price. Even though US has great power in the global economy, there are also other major economy like Japan can also do their part. So, there must be some other factors that also pushes the oil price up. For instance, the heavy dependence on oil and huge demand for oil in the oil market can also cause price of oil to rise.

Secondly, the author stated that demand for oil will continue to soar and this will be a big catalyst for the surge in oil price. He explained that due to the rising economies of India and China, demand for oil is an all-time high. However, i do not agree with the author on this point. I feel that the world is slowly moving into a high-technology one and thus finding alternative fuel should not be much of problem. As a result, oil will then become not the only fuel such that it is so important for many oil-dependent countries and industries. This thus will lead to a fall in the demand for oil instead of what the author said about the soaring demand. For example, more developed country like Japan, is venturing and searching into alternative fuel like liquefied natural gas and tidal energy. In addition, not only the demand for oil will fall, because of this, the alternative energy sources will put a downward force on the high oil price, controlling it in the healthy level.

In conclusion, in my opinion, i feel that the problem of the surge in oil price has to be solved as quickly as possible so as to reduce or prevent the effects of it from worsening. The government as well as international organizations like UN, IMF can come in to play a part in controlling the situation. Only by working hand in hand, i feel that the problem can be permanently uprooted.

Chew Kor Lin, 07S24

Chew Kor Lin

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Re: First Review of The Century

Post on Thu Jul 03, 2008 8:30 pm

There should be measures being implented to prevent oil prices from rising continuously.For example encouraging the use of alternative energy source by offering incentives to industries who comply with that.This should help to ease the soar in demand.Stopping the work of industries is not an option as it affects economic growth adversely.It is not possible to decrease the demand,but if we are able to keep the demand at a stable level,the price will remain stable as well.

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