The continuing rise in oil prices has sparked an intense debate. The primary explanation for the upward march in oil prices is demand/supply imbalance accompanied by higher exploration and development costs for oil.
Whatever the cause, the high price of oil, which is hovering around $140 a barrel, has intensified the search for scapegoats and a solution to soaring prices, which are being blamed for everything from rising food prices and inflation to slowing economic growth, according to the Samba Monthly Monitor, released Wednesday.
In a sign of mounting concerns worldwide about the political and economic fallout from high oil prices, Saudi Arabia hosted an emergency consumer-producer meeting in Jeddah last Sunday. At the meeting, the Saudis agreed to boost oil production by 200,000 barrels per day. This comes on top of an increase of 300,000 barrels per day which took effect in June and would bring production to 9.7 million barrels per day. Kuwait also announced on Tuesday that it will increase its output by 300,000 barrels per day starting mid-2009. Other producers were non-committal in terms of raising oil production. The increase in total oil production by Saudi Arabia this year, however, may not offset the shortfall in output now expected from non-OPEC producers.
Recent indications suggest that non-OPEC output might have picked up noticeably in May with the bulk of the increase coming from the North Sea, Canada and Brazil. While the pick-up in production from Canada and Brazil could prove to be sustainable, the bounce in output from the North Sea is likely to be temporary as the summer maintenance season comes into play. While addressing the Jeddah Energy Meeting, Custodian of the Two Holy Mosques King Abdullah, said “there are several factors behind the quick and unjustified increase in oil prices recently. They include the frivolity in the market of speculators for selfish interests, the rise in consumption in a number of developing economies and increasing taxes on petroleum in a number of consuming countries.”
Saudi Arabia’s already robust economic growth outlook has been further bolstered by its decision to add up to 500,000 barrels per day of crude oil to global markets. The extra crude will push real hydrocarbons GDP growth up to 9.5% this year, while boosting overall real GDP growth to 7.4% — the fastest rate for five years. “Despite the additional supply we still anticipate an average price for Brent of $120 a barrel this year, climbing to $135 a barrel in 2009 as US demand begins to recover. Based on this outlook, we expect Saudi nominal GDP to expand by a staggering 45% this year, to almost SR2 trillion ($545 billion), putting the Saudi economy ahead of Sweden and just behind Turkey, in the IMF’s global rankings,” Howard Handy, general manager and chief economist of Samba, said.
The near relentless rise in oil prices has garnered the recent attention of regulators, international organizations and market participants alike. In the United States, hearings have already been held in Congress on the global oil market situation. The Commodity Futures Trading Commission (CFTC) is stepping up surveillance and closing a loophole that will now force unregulated commodity index funds to report positions. At its meeting on June 19-20, the European Council made a number of proposals to bring prices down. These include reducing value-added taxes on energy-efficient products and stricter transparency rules on commercial oil stocks to contain prices in the short term, while promoting efficiency and diversity of supply in the medium to long term.
Among developing countries, a number of governments are being forced to scale back subsidies, as they can no longer absorb the fiscal pressure of shielding consumers from higher world oil prices. The Indian government has raised prices by around 10%, while in Malaysia and Indonesia prices have been hiked by 41-63% and 30%, respectively.
The price increases have triggered protests in these countries, while in industrial countries high fuel prices have led to a wave of worker actions. In Europe, truckers from France, Poland, Portugal, Spain and the United Kingdom have all staged strikes, forcing authorities to implement emergency measures to ensure supplies. (Arab News)