Wednesday, June 11, 2008

Whats with the Oil Prices

Someone said...finally beer is cheaper than Drink! Dont Drive!
Here is my piece on what's driving these prices. The perspective of this "paper" is to give you a general, global macro idea, with one or two interesting pieces of data - good enough to make you sound intelligent while having conversations with the Office's Corner Room people . So here goes!
Oil Prices
Mid 80’s it was $25 per barrel; in 2005 it was $40 and then $50. briefly exceed $75 in the middle of 2006; per barrel maximum of $138.83 was reached on June 6, 2008. Sustained prices at these levels could mean recession similar to that in the early 80’s. Whats driving these prices?
1) Demand
a) World population is growing faster than oil production- by 2030, its expected to be double that of 1980.
b) Growing demand from establishing countries like China and India. Eg: China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996-2006 (doubling rate of less than 10 years)

2) Supply
a) Limited amount of fossil fuel and remaining accessabile supply is consumed more rapidly every year. Remaining reserves become more technically difficult to extract and therefore more expensive
b) Political turbulence – problems in the middle east, Venezuela and west Africa (Nigeria)

3) Financial Speculation (This is the big one!)
Current world consumption of oil at 87 million bpd is far exceeded by the "paper market" for oil, which equals about 1.36 billion bpd, or more than 15 times the actual market demand. So you can imagine.

4) Effect of US Dollar on Oil
The price of oil is closely tied to the value of the US dollar because oil is traded in dollars. This has led to concern among some economists that the principal earned from the sale of oil may lose value in the long run if the US dollar loses real value.

Sounds so "economiksy".... and it looks good on my blog! i love it.

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