Oil Market Vital to World Business
The oil market is dominated and manipulated by the OPEC cartel, which controls the lion’s share of the world’s oil reserves and has the lowest production cost. Its collusive actions distort market outcomes and have led to erroneous conclusions about the true state of the oil supply. The oil market is not static. It is highly dynamic.
Supply and demand keep shifting all the time, every minute of the day, which results in an equilibrium that necessitates a new price. The oil market is vibrant and crude oil prices are bobbing up and down like a float on the water. Around the world experts make their analysis and try to explain why. Often they are wrong.
The oil market is sensitive and vulnerable because it is so massive, which in turn keeps alternative energy forms suppressed and undeveloped. And, the substitute energy forms that that have been introduced are not nearly as versatile as petroleum. The oil market is peculiar because of the varying levels of elasticity of the demand and supply in both the short and the long terms. The fluctuations of prices are enormous. The oil market is not immune to a stock market crash, unless oil consumers also are immune. If a stock market crash leads to decreased demand for oil, because people and businesses become poorer, then the price of oil will fall.
The oil market is more politicized than most other markets. Due to the non-renewable nature of the resource, it is a rent to be captured. The oil market is full of smoke that provides perfect cover for corruption. Every price blip calls forth explanations in terms of Chinese demand, more violence in Nigeria’s delta region, cold weather, threats from Venezuela’s Hugo Chavez or heightened tensions over Iran’s nuclear program. The oil market is becoming an increasingly important aspect in finance. As a giant consumer of oil, China must fully exploit financial strategies to counter the fluctuation of oil prices as an important aspect of its strategic planning for energy and resources.
The oil market is served by a number of companies, both multi-national and domestic independents. The oil market is currently confused with conflicting signals and great uncertainty although there appears to be a general consensus that prices are in danger of reaching crisis proportions at extraordinary high levels. However, in reality prices over the next 18 months could be extremely volatile. The oil market is perfect for hedges, with enormous liquidity, heavy trading in forward months, and energy stocks with huge capitalization with which to employ those hedges.
The oil market is going to continue reacting to every indication that the US economy is or isn’t slowing. But until or unless that same weakness starts to show up abroad, it will be just a lot of splashing around. The US is not nearly the driver to the world economy that it used to be.
World oil demand in 2008, which closely tracks economic growth, is projected at 1.35m b/d, or a 1.6% rise from last year. Demand is growing swiftly in India and China. Demand, meanwhile, is also essentially fixed, since there is no ready substitute for gasoline, diesel, and jet fuel. Flush with cash from investors of all stripes, traders observing these conditions have bid prices up and up. Demand recently has dropped by 2%, but the price keeps going up. Where in economics does this ever happen except in a manipulated market?
OPEC should indeed be responsible for at least part of the pricing problem. In the previous autumn and last spring and in recent years, OPEC’s policy objective has been to keep the oil reserve at a rather tight level, so as to push up the price and it succeeded. OPEC is a cartel made up of 12 oil exporting governments. It’s chaired by the Kingdom of Saudi Arabia, which sits atop the largest concentration of light sweet crude in the world. OPEC is doing its level best to control the amount of Oil that is brought into the market thereby controlling price. They have announced consistently in the past 3 years that they are set on controlling production.
The US has become increasingly dependent upon foreign oil and has been slow to implement energy conservation measures. With oil prices now trading in the $120 to $135 range this price level will force some level of conservation upon the US. The price of oil is set to cause a lot of strife in today’s world. As the financial differences between nations who produce a surplus of oil, like Russia and Venezuela, and those who consume far more than they produce, like the US, increase tensions will accelerate.
Unfortunately, as we move forward the probability of the US being involved in more “oil wars” is high. We will not be able to drill or to develop alternative energy sources fast enough to avoid a true crisis. And for many uses, like jet fuel, there isn’t really a viable substitute for oil based products. That means the vast military resources of the US may well be used in ways designed to not only protect oil supplies but to insure that they reach the US market.
Should this take place what other military powers think and the steps that they will take to counter US actions will probably lead to at a minimum a series of surrogate wars waged against US interests. The future of peace in the 21st century does not look bright.
