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Recent Developments And Outlook In Oil Markets

3074 words - 13 pages

IntroductionThe world oil market has undergone tremendous change in the past three decades. In the 1960s, the price of oil was fixed by the major international oil companies. The early 1970s saw the transfer of property rights from these multinationals to the host countries, which was the start of a new era in the oil industry. Middle Eastern countries, through the Organization of the Petroleum Exporting Countries (OPEC), were key players in the transformation of the market since they owned the bulk of world crude oil reserves. The series of oil price increases in 1973-1974 was a hallmark period for the oil market because it coincided with the transfer of property rights to the host ...view middle of the document...

In the past 21 years, oil price has only traveled above the $40 level in times of war - the lead-up to the Gulf War in 1990 and the Iraq war last year. Now a $40 price looks familiar. Demand has grown at its fastest pace in 28 years. This year's increase in demand has caught the entire oil supply chain by surprise, forcing oil tanker rates to rise to record levels because of the lack of tanker availability. The increase has also created bottlenecks in the global refinery industry following two decades of overcapacity. Both of these factors have contributed to the $10 rise in oil prices this year above the 2003 average. It has also swallowed up most of the spare production capacity OPEC has carried for the past 25 years. Analysts are already predicting prices remaining high for the rest of the decade (Morrison1, 2004).OPEC also indicated it will hold another meeting early in the winter, providing an opportunity to proclaim more output cuts if necessary. The Saudis are especially worried about an overhang of oil in the second quarter of 2005, when demand weakens after winter. OPEC made the latest quota decision "to avoid an extraordinary buildup in inventory levels" (Reed and Cohn, 2004). In addition, the OPEC countries are especially upset about the dollar's steep fall, which has eroded the purchasing power of their oil revenues."We are concerned especially about the dollar devaluation . . . because we lose more than 30 per cent of our revenue by the dollar depreciation" (Morrison2, 2004).What's behind today's high oil prices? It starts with an unexpected hike in demand. Rapidly rising oil consumption (Figure A1) has eaten away the safety margin provided by spare production capacity. With little surplus capacity available, buyers are worried that potential disruptions in a number of producing countries including Russia, Iraq, Saudi Arabia, and Venezuela could lead to major shortages and further spikes in prices. Not only are prices high, but day-to-day swings of $1 or more a barrel are also becoming increasingly common.Why has huge demand caught the world by surprise? A synchronized global recovery is the key factor. For the first time, most of the planet is growing simultaneously. Demand is likely to grow by a record 2.5 million barrels per day in 2004, a 3.2% increase from last year. Consumption growth in 2004 alone is likely to be close to the total reached between 1998 and 2002, even though many had been predicting relatively stagnant demand. The hottest growth area has been China, which showed year-on-year increases of more than 20% in April and May. This year China will consume 830,000 barrels a day more oil than last year, accounting for a third of world demand growth. Switching manufacturing from the West and Japan to less efficient facilities in China just adds to the nation's thirst for oil. The U.S. continues to defy predictions as the economic recovery progresses and as Americans continue to buy gas-guzzling vehicles and...

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