OIL: Price Bubble Could Burst in Medium Term

By Humberto Márquez Reprint | | Print |

Humberto Márquez

CARACAS, Mar 17 2008 (IPS) - While oil prices recently soared to a record 111 dollars a barrel, fuelled by the weak U.S. dollar, analysts warn that the bubble will not last forever, and may burst in the medium term.

"We are seeing an oil-stock market bubble," Elie Habalián, an expert in petroleum economics, told IPS. "In the last two months, prices have gone from around 90 to 110 dollars a barrel – a rise that far outstripped the devaluation of the dollar, which in the same period went from 1.46 to 1.56 against the euro."

The bubble "at some point will burst, ushering in a drastic fall in prices in the medium or long term, and if OPEC feeds the bubble, it is creating a knife that could cut its own throat," said Habalián, a former representative of Venezuela at OPEC (Organisation of Petroleum Exporting Countries).

Why? "If you are in a government (in an oil-producing country) and you are cashing billions of dollars every day you may not be able to see beyond your nose. You are very happy with the money you receive each day and don't realise the price you will pay for this will be later on," Saudi Sheikh Ahmed Zaki Yamani, head of the London-based Centre for Global Energy Studies (CGES), said in a recent conference in Madrid.

Yamani, who served as Saudi Arabia’s oil minister for decades, gave first-hand testimony of how, in the early 1970s, former U.S. national security adviser and secretary of state Henry Kissinger helped orchestrate the rise in oil prices, which led to a loss of influence over the market by OPEC.

"In the 1970s, the high price of oil helped create alternative sources of supply, like the North Sea, Mexico and so on. So these sources took away some of OPEC's share. Prior to this, OPEC used to produce about 70 percent of the total world demand," said Yamani.

"Nowadays it is not alternative sources of supply that are the threat to OPEC, but alternative sources of energy," whose emergence is being fomented by the high energy prices, he said.

"But the real change," added Yamani, "will happen the day they can use hydrogen at a reasonable price."

Even before that futuristic scenario takes shape, however, "prices will be hit by the measures taken by the United States and the rest of the world to address the underlying problem: the U.S. trade deficit," said Habalián.

The U.S. deficit stood at 711.61 billion dollars in 2007, according to the U.S. Commerce Department.

In response to the subprime mortgage crisis, the Federal Reserve cut interest rates, thus leading to a new devaluation of the U.S. dollar.

The weakening of the dollar "prompted holders of dollars to take refuge in gold, both the yellow kind (whose price has hit a new record of over 1,000 dollars an ounce) and the black kind (oil)," said Habalián.

While global oil consumption stands at 86 million barrels a day, on the futures market, "paper oil" is often traded at two times or more the sum corresponding to real consumption levels, thus inflating the bubble.

At the start of the third week of March, prices dropped nearly four dollars, with West Texas Intermediate (WTI), the sweet light U.S. benchmark crude, falling to around 106 dollars a barrel, and North Sea Brent, the European benchmark, dropping to 101 dollars a barrel.

Last week, however, prices had risen by about five dollars, according to Venezuela’s Energy Ministry, with WTI climbing from 102.76 to 108.41 dollars a barrel; Brent from 104.70 to 105.12 dollars a barrel; and the OPEC basket of crudes from 96.89 to 100.56 dollars a barrel.

The members of OPEC are Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela

For net importers of oil in the developing world, "these high prices are a veritable tragedy, contributing to anarchy and more and more precarious living conditions among people in those countries."

"OPEC should address this problem, with no political strings attached for the beneficiaries, who should not be the victims of a wave of stock market speculation," argued Habalián.

But the expert said the solution does not lie in increasing oil supplies. "Market demand is truly covered, and if OPEC produces more oil, all that will do is further inflate the speculative bubble," he said.

Venezuelan Energy Minister Rafael Ramírez has repeatedly stated that in his view, the market is so well supplied that OPEC should not modify its current output level of just over 30 million barrels per day for the next quarter.

"Prices have gone beyond the fundamentals of the market, due to aspects like the devaluation of the dollar and the state of the U.S. economy," said Ramírez.

For Luis Giusti, who is also with the CGES, "of the more than 100 dollars a barrel, 30 dollars are purely financial, so that if we go to the fundamentals, we would be talking about a price that should be around 70 to 75 dollars per barrel," he said.

Venezuela, meanwhile, like Iran, has begun to price some oil export shipments in euros rather than dollars, said José Suárez, with the specialised publication Petrofinanzas.

Caracas and Tehran have suggested that OPEC switch from a dollar standard to a euro standard, or even to a basket of currencies, for oil trading.

However, "we have to point out that while the U.S. economy has problems, it is not collapsing, and the strengthening of the euro will also have to stop at some point. The Europeans also have to make their exports competitive," said Habalián.