Thursday, July 3, 2008

Rising Oil Prices Not Due to Speculation

The International Energy Agency (IEA) argue that rising oil prices are not due to speculation, but reflect the underlying conditions of supply and demand in the oil markets.

The IEA argue that most suppliers are working flat out to increase supply, but, there has been disappointing growth in new oil fields. At the same time, the oil market has seen increased demand from emerging economies in Asia, Africa and Latin America.

They identified 6 other factors behind high oil prices
  • low spare capacity within Opec;
  • Political concerns over conflict in Nigeria and Iran.
  • Expectations of rising prices because of peak oil theory
  • Growth in demand from China, the second largest economy in the world.
  • rising oil industry costs;
  • tight refining capacity;
  • and stockbuilding by refiners seeking to lock in profits.
The IEA also suggested that the idea of speculation was attractive because it helped provide a convenient answer for people hoping the price of oil will fall. However, if speculators are not responsible for rising oil prices, these conditions are likely to keep oil prices high for the foreseeable future. Rather than Western governments demanding action for oil prices to reduce, the solution may be to work on alternatives and reduce our dependency on oil.

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