Why oil prices won’t stop at $100
January 3rd, 2008 by Fereidoon Sioshansi, EEnergy InformerHow expectations change. One year ago, talking about $100 oil was pure speculation. But as we reach the milestone, many are talking about why it won’t stop at $100. The fundamentals point in that direction.
International Energy Agency (IEA) projects that world demand for energy will grow by 53% from its 2004 level under a business-as-usual scenario. Assuming aggressive policies to dampen growth might cut this to 37% – a big if. But regardless of the growth, fossil fuels – and the accompanied carbon emissions – will meet the bulk of demand, at 77%, slightly below today’s 80% if one assumes aggressive growth in the share of renewable energy and massive new investment in nuclear capacity to replace the existing aging units.
Those who are concerned with carbon emissions will have to contend with more than a 50% increase in emissions during the same period under a business-as-usual scenario. Assuming green governmental policies, this may be reduced to 33% or so, still not a pretty picture.
As far as oil prices are concerned, the demand appears to be growing unabated, notably in developing countries. There are no short-term substitutes for oil particularly in the transportation sector – hence little demand elasticity. Supplies are tight as many exporting countries are facing mature and/or depleting fields and prospects for finding major new fields cannot be taken for granted. China and the growing economies of the Middle East alone have added over 800,000 bbls/day to world oil consumption in 2007.
In contrast to prior oil shocks, prices are now rising not because of a supply disruption but because demand is growing faster than current reserves and inventory. Describing the current oil market dynamics, William Ramsey, deputy executive director of IEA, says, “What we have had in the market is a demand shock, not a supply shock and the system reacts differently.
Rising with demand
Recent milestones in price of oil, $/bbl in nominal dollars
Source: Thomson Datastream and others
Posing and answering his own question, Mr. Ramsey adds, “The market would not react in this way if it was relaxed. Why is it not relaxed? Because it is tight …. When markets are that fragile, they react dramatically.” Sadad Al-Husseini, an oil industry consultant was quoted in the press predicting a $12/bbl price rise for every million barrels increase in demand.
A sign of market’s expectations for further price increases is the growing volume of call options for oil at $120, $150, even $250 at NYMEX and other exchanges. Consumers and speculators are taking option contracts that would insure them against further rises in oil prices in the coming months. Ironically, the frantic rush to buy call options – contracts that gives the holder the right to buy oil at a predetermined price and date – is among the reasons for further increases in oil prices.
F.P. Shioshansi
This post is extracted from EEnergy Informer, December 2007 issue.
May 4th, 2011 at 11:50 am
Oil prices don’t depends only in geopolitical instability; there are many factors which affect the oil price rise. If we take in consideration the rising demand of emerging markets and environmental issues plus the very know future predictions as peak oil, I might say that oil price instead stop about 100$ it will increase in the few next years.
The good news are that if oil price keep going high, developed countries are compelled to keep looking for new energy solutions, maybe it will stop the rise and could balance the production with the demand of oil. If there are not short-term substitutes as energy source concerning transport sector, new policies and strategies are important to assure the stability of fuel prices as the first and most effective energy source for transport.
To finish I would say that oil prices rise is completely necessary for changing paradigms, which is totally necessary in these moments to stop the business as usual model in developing countries and to prevent a worse damage, and a new oil crisis.