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Why are oil prices skyrocketing?

©

Latest update : 2008-06-01

Currently over 130 dollars a barrel, oil prices keep climbing. The oil producing countries (OPEC) affirm that their production is stable - the real cause of the price hike, they say, is financial speculation.

The prognosis is clear: at 133 dollars a barrel, the price of oil has not finished its ascent. Voices call out – begging oil-producing countries to increase their production with the hope that prices will fall.  But the majority of oil-producing nations are already at maximum capacity.

 

Saudi Arabia is the only country that recently increased production, but the price of oil did not change. “Saudi Arabia is the only OPEC country that can increase production,” explains Raphael Kahane, FRANCE 24 business editor.

 

“We want to increase production, but where is the consumer?”

 

During George W. Bush’s presidential visit to Saudi Arabia on May 16-17, 2008, the pricincipal discussions centered on the price of oil. The US Congress is pressuring the American president to convince his Saudi ally to be more generous with oil production.

 

For a long time the Saudis believed that the international demand was not significant enough to increase output. During a press conference, the Saudi oil minister, Ali Al Nouaimi, said, “We are ready to increase our production, but where is the consumer?” According to Al Nouaimi, “We are not able to increase our production if there is no additional demand.”

 

“There is no queue waiting to buy oil,” adds Pierre Terzian, director of the weekly publication Pétrostratégie.

 

Recently, “the Saudis adjusted their production mainly to cover the lack of oil production in Nigeria,” explains Raphael Kahane. Indeed, the ongoing civil conflict that afflicts the 12th largest producer of oil in the world affects worldwide production levels.

                                                                                                                                                                                          

Why do the prices increase?

 

Abdullah Alalami, a Saudi economist, blames “the international financial markets’ speculations on the price of oil.” Abdullah Rashid, a journalist from the United Arab Emirates, agrees that “the price problem is strongly related to speculations.” However, he adds, “the market does not suffer from an oil shortage. There is more supply than demand. Thus even is the OPEC countries increase their production capacity, it will not affect the price.”

 

Then who is to blame for the increasing price of oil? “Ask the bankers,” Pierre Terzian answers wryly when asked by FRANCE 24.  While the demonstrations in Europe against the rising price of oil gain momentum, he says that “the market does not have a supply problem.” And adds, “The OPEC countries are producing at full capacity.”  Saudi Arabia “remains the last recourse because it can increase its production if there is an urgent need.”

 

Tense geopolitical context

 

According to the Saudi economist, the insecure climate in the Middle East contributes to the price increase. “Looking at the security situation in Iran, in Iraq and in the region in general, everyone worries that the producer countries cannot guarantee the transport of oil,” explains Alalami. Additionally, “there are problems with the pipelines near the Caucuses thus resulting in rising costs.”

 

The markets anticipate tensions in the region, and “as a result, certain countries stockpile oil and sit on it.”

 

The economist is pessimistic, and believes that before the end of the year, “oil prices will continue to climb upwards of 150 to 160 dollars per barrel.”

Date created : 2008-05-31

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