Up, Up and Away: What's Really Driving the Price of Oil?
The price of crude oil has doubled, from $50 to $100, within months. The increase cannot be attributed to the fundamental data, which have hardly changed. And the looming recession ought to drive the price down. So why is oil getting more expensive?
Pumps in Oklahoma are less important to the price of oil than pension-fund managers.
Robert Felts, a friendly old man who works for the Cushing Industrial Authority, likes to show visitors the historic oil pump in the middle of town. He tells the story of how, in 1912, a giant oil field was discovered nearby that placed Cushing on the map and showered it with more than two decades of prosperity. Up to 50 million barrels of oil bubbled out of the ground each year in those days. "Our refineries could hardly keep up," says Felts. To solve the problem, the oil barons of the day had large storage tanks installed in the surrounding prairieland.
Located at a key intersection in the North American pipeline system, Cushing is home to the largest oil storage facility in the United States. Oil traded on the New York Mercantile Exchange literally changes owners here in Cushing. If the tanks are full, prices sink. But if levels in these tanks fall, prices rise. A rule of thumb for traders: Supply and demand control the market.
Normally, at any rate. But in recent months the conventional wisdom has flip-flopped. Within a year the price of a barrel of crude has doubled, from $50 to last week's high of $100. Nothing seems impossible now. Some analysts see prices rising to between $120 and $150, which would have dramatic consequences for the world economy.
Similarly spectacular price developments have only occurred four times in the last few decades: in 1973, when the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo for the first time; in 1979, as a consequence of the Iranian revolution; a year later, when Iraq invaded Iran; and in 1990, when Iraq invaded Kuwait.
Which leads to one the most provocative questions being asked about the world economy today: Why are oil prices soaring again?
It's All Speculation
There are plenty of answers. Some hold the crisis in the Middle East and constantly growing demand in China responsible. Others blame producing countries for keeping the oil spigot half-closed.
Still rising (click to enlarge).
OPEC arrives at the same conclusion. "The fundamentals are right," says OPEC President Mohammed al-Hamli. In fact, the cartel has expected excess supply on markets since early February -- a result of the American economic crisis.
This excess supply would normally cause the price per barrel to fall. Instead, dealers have now broken through the magic $100 threshold for the second time in only a few weeks.
The mood is festive among oil barons, who seem to be unimpressed by global recession fears. Exxon Mobil recently reported its profits for 2007: $40.6 billion, a record for the world's largest energy company, and in international economic history. A company has never made so much money in a year.
Enormous amounts of money are currently changing hands in the business of oil contracts. With the American real estate debacle infecting ever larger segments of the capital markets, from stocks to bonds, investors are seeking alternatives worldwide. Oil, with its supposedly straightforward market rules and ever-rising prices, seems to be a perfect tool for spreading risk and maximizing profit. But many investors will have a rude awakening when they realize that an investment in oil, though it may look different, is no less a gamble than other types of investments.
- Part 1: What's Really Driving the Price of Oil?
- Part 2: "I trade in news"
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