Reuters’ Factbox: Why oil prices hit a record high?
Access date: 28 August 2008
Prices have rallied from a dip below $50 at the start of 2007 and this year have risen by around 40 percent from $95.98 a barrel at the end of last year. Adjusted for inflation, oil is well above the $101.70 peak hit in April 1980, according to the International Energy Agency, a year after the Iranian revolution. The balance of demand and supply is tight with daily demand of roughly 86 million barrels per day, almost the same level as daily supply.
The following are other major factors that have driven the oil market higher.
(1) Dollar weakness and funds
A combination of weaker performance in other asset classes and expectations of continued strength across the commodities complex has drawn in investors and speculative funds, providing further support for the market. An added incentive for them has been the weakness of the dollar against other major currencies, which makes dollar-denominated commodities relatively cheap. They are also seeking an inflation hedge, as commodities tend to rise when other asset classes fall.
The Organization of the Petroleum Exporting Countries (OPEC) has been at the forefront of those citing speculation and a weak dollar as the reason for higher prices, saying it is pumping enough oil to keep the market balanced. Saudi Arabia, the biggest OPEC producer, is expected to raise output close to 9.5 million barrels per day (bpd) in June up from around 9.1 million bpd in May. OPEC has not officially increased output since a meeting last September and has no plans to meet formally until September 9.
(3) Peak oil?
Some analysts have questioned whether OPEC is capable of raising its output significantly. The so-called pessimists have argued the world's oil supplies are at or near a peak. Optimists say there is still plenty more oil and improved technology will ensure it can be extracted from the ground, but a host of political issues has hindered production from many of the biggest reserve holders. Iraq's output has been disrupted by years of sanctions and then war. Sanctions have also limited exploration in Iran and violence has interrupted flows in Nigeria.
Adding to the difficulties of getting oil out of the ground, high prices have fuelled a trend for resource nationalism, or resource-holders seeking to keep the bulk of their natural wealth for themselves. The biggest OPEC producers already prohibit foreign operators from accessing their oil reserves. Non-OPEC Russia, the world's second biggest oil exporter, has also been limiting foreign involvement in its upstream while its output has stagnated.
There is mounting evidence high prices have begun to erode demand, but continued growth in China and other emerging economies is expected to offset the impact of any fall in developed countries. While high taxes reduce demand in some developed economies, subsidies spur consumption in emerging economies. In the developed world, some governments are considering reducing taxes, while emerging economies, struggling with the growing burden of subsidies, have started to lift them.
(5) Refinery Bottlenecks
Even if there is plenty of crude to meet demand that does not mean there is an adequate supply of refined products, such as diesel and gasoline, as there is a lack of refining capacity. Faced with planning battles and reluctance to invest in the downstream sector, which is not always profitable, the world's biggest energy consumer the United States has not built a new refinery for decades.
Anwar vs. Ahmad Shabery public debate
The debate entitled ‘Form the government today, reduce fuel prices tomorrow’ was organized by news portal Agenda Daily and took place at Dewan Bahasa dan Pustaka in Kuala Lumpur at 8.30pm on 15th July 2008. The contents of the debate and other off-the-stage justifications from the government as well as counter-arguments from Anwar Ibrahim are summarized as below:
Government: Global oil price increase, thus increase the government’s financial burden to subsidize.
Counter-arguments: Malaysia is a net oil exporter. Thus, increase in oil price should be beneficial to Malaysia. Increase in net oil revenue could be channel towards domestic fuel subsidies.
Government: Fuel (petrol) price in other foreign countries are much higher. Examples are Norway and Finland. Hence, fuel in Malaysia is under-priced.
Counter-arguments: Those countries that have higher fuel price are non oil-exporting countries. Furthermore, theirs income per capita are much higher than Malaysia.
Government: Petronas already contributed much of its profit back to government for subsidies. Government could not take all of Petronas profit as the company needs retain profit for further development.
Counter-arguments: Repayment from Petronas is enough; only the usage of its repayment is questionable. Example is channeling government revenue to infrastructures and giving tax relief incentive for the benefit of industry players is actually another form of “subsidy”, but not to the poor but to the capitalist. Unnecessary projects and corruption cause leakage to the needed fund to subsidy for fuel. Deals with IPP also seen as leakage and benefit to capitalists rather than the poor citizen.
Government: Malaysia’s oil reserve will finished in near future. Therefore, government needs to have prudent saving from current oil revenue for the benefit of the future. Otherwise, a more shocking bigger fuel hike may happen once Malaysia turn from net oil exporter to net oil importer.
Counter-arguments: Those reports about exhaustion of Malaysia oil reserve are based on assumption that no other oil field would be found in Malaysia. Thus, if more new oil field found, Malaysia would still be net oil exporter. Furthermore, Petronas is currently exploring oil field overseas instead of locally. Petronas should be encouraged to continue doing so to prolong exhaustion of oil reserve in Malaysia. Investment returns from Petronas could also be another source of funds for fuel subsidies.