Crude Is The Right Word For Oil Prices
By Stephen Smith
June 5th, 2008
Since the beginning of the year, crude oil prices have gone from $87 a barrel to $130 a barrel, a 49% increase! Gasoline pump prices have shot up to a record high of $3.91 per gallon nationally and are above $4.00 a gallon in many regions. As oil prices continue their upward march, concerns have been raised that crude oil prices could spike significantly higher, perhaps to $200 a barrel in twelve months. Arjun Murti, a Goldman Sachs oil analyst, is now calling for the $200 a barrel price tag in twelve months. T. Boone Pickens, a well-known energy speculator, predicts $150 a barrel by year end.
Only 7% of the world’s estimated oil and gas reserves are in countries that allow the major independent oil companies to develop their fields. As oil prices have soared, these governments have chosen to spend their windfalls to diversify their economies away from energy. Global oil revenues for all producing countries have quadrupled from roughly $500 billion during 2002, to nearly $2 trillion last year. The problem isn’t that the world is running out of oil, but rather cheap oil. Sovereign oil companies now control more than 80% of the world’s oil reserve. Saudi Arabia’s revenues from producing nine million barrels of oil a day has gone from $100 billion to over $300 billion since 2003. Why should it bother to incur the huge cost of finding and producing more oil?
The governments of oil producing countries are also meddling in ways that are stimulating demand and restricting supply. Investments in Russia’s oil industry dropped after Putin arrested the head of Yukos Oil in 2003 and confiscated the company’s assets. Countries such as Venezuela, Mexico, and Iran are among those countries which have nationalized their oil assets. Many governments are also subsidizing their domestic gasoline prices. Saudis, Iranians, and Iraqis pay between thirty to fifty cents a gallon for gas; Venezuelans pay seven cents a gallon. The world’s oil supply would increase markedly if the major oil companies had access to these nationalized oil fields.
Could it be that all the talk about oil spiking to $150-$200 a barrel has caused oil prices to rise to $135 a barrel? In recent weeks all we have heard about is that production in Russia, Mexico, and Saudi Arabia may have peaked. The oil market is ignoring the fact that $100-$150 price for a barrel of oil may be starting to dampen demand and boost supply. Russia is cutting taxes on its oil industry to boost investments in its oil fields, and Brazil continues to find more oil offshore and invest heavily in the production of its fields. Americans are driving less. The Transportation Department reported in March that Americans drove 11 billion fewer miles than in March of 2007. The U.S. Congress may consider ending its long-standing ban on domestic drilling in certain areas and hopefully will design an energy bill that actually makes sense.
Needless to say, the price of a barrel of oil is dependent on many factors with demand being foremost. As the price of crude is reflected at the pump each time we fill up, it has an immediate impact on our willingness to buy and may serve as the catalyst for us to adopt public policies which reduce our dependence on this finite resource.
