Oil remains to be a central topic that persistently dominates over important headlines and breaking news. Once again, the price of oil is on the rise and continues to break record highs at over US $135 per barrel. And so continues the endless confusion in attempting to interpret these rises, trying to find ways to deal with the situation and determine a course of action for these constant rises.
With all due respect to the supply and demand theory and the increasing fears of the market and production monitoring institutions’ grave warnings that the market is heading towards a stage in which demand will be higher than supply – there is a new element that has forcefully entered to explain this frantic rise.
This element is stock investors. Indeed, there is a considerable group of stock traders who have frantically raised the price of oil and consequently the price of gold, silver and other commodities to such high levels. This group is buying large quantities of oil for future pension portfolios and endowment investments of universities and major charities. These annual purchases of oil alone reach approximately 848 million barrels whilst China’s increasing annual demand is estimated at 920 million barrels. The quantities, in general, are very close and the reason behind this mad increase can be “understood and explained.”
Whilst China’s level of demand can be explained by supply and demand, the first figure is a logical explanation of the speculation that commodity markets in general and oil in particular has caused. However, this leads to further debate and controversy if what is happening now is the hasty building of a bubble similar to what happened in the 1990s to high-tech companies and what has taken place recently in the real estate sector. Perhaps a “bubble” is being formed; nevertheless, most rational views state that the effect of this bubble is likely to be limited as a result of demand that continues to increase at an extraordinary level.
This unsettled situation, in relation to the major industrialized countries, has in turn produced an unsettled reaction. Perhaps the US Congress bill that penalizes the OPEC countries confirms that there is confusion and is an example of the “stupidity” of political legislations when people in charge become strained and make proposals if only to satisfy an angry public and to prove that some kind of action is being taken.
It is no longer strange to hear that the price of oil may reach $200 per barrel in 2008. This would mean that the price of a gallon at service stations in the United States would exceed seven dollars. Moreover, this would also mean a complete change in lifestyle for the citizens of industrialized countries, some of the signs of which may have begun to appear already.
For example the giant Ford Motor Company has made significant cutbacks in production, especially with regards to trucks and SUVs since they have high levels of oil consumption. American Airlines has adopted a new approach in aviation services, in that every passenger pays for every piece of luggage that he/she wants to travel with.
This hectic climate of oil prices has led to an increase in demand for the Toyota Prius, which runs on electricity and gasoline to the extent that the waiting period for one of these cars exceeds two months. Moreover, the use of public transport in all its different forms has also reached new levels.
Sales of Vespa motorcycles, which are simple bikes and do not consume high levels of petrol, rose to over 40 percent. It is likely that new environmental legislations will be enacted to encourage decreases in oil consumption and offer incentives in that regard. However, the greatest challenge remains; how will oil producing countries employ their revenues during this “final party” as some would call it. We hope that these revenues are not spent blindly on buildings, shopping centers and hotels!