Free Articles Online » A Powerful Strategy To Bring Down The Crude Oil Prices A Powerful Strategy To Bring Down The Crude Oil Prices Published: 18.08.2008 | Author: Sudhir Goyal | Category: Current Events
All of us are hit hard by high and rising Crude Oil prices. Since the grains are being used to produce bio-fuels Whitney Mercilus Texans Jersey , food prices too has risen sharply. Due to rise in both food and fuel prices the inflation is scaling new heights across the globe.
Production cost and Demand-Supply situation
Most of the nations, for their oil need, are dependent on OPEC (an organisation of 13 oil exporting nations). For OPEC nations, the production cost of one barrel (1 barrel equals 158.9 litre) oil is around 15 to 20 dollars(Source: Business Today). In last one year, world oil consumption has increased from 85 million barrel per day to 86 million barrel per day. However, the oil production is stagnant at last year level of 85 million barrel per day.
Abnormal Oil price rise is due to speculation
Even though there is only 1.2 percent mismatch between demand and supply Will Fuller V Texans Jersey , the oil prices in last one year has almost doubled from about 70 dollar a barrel to a level of 140 plus dollar a barrel recently. Clearly, this abnormal rise is not reflecting natural market forces of demand and supply.
This abnormal rise in oil prices is a result of very high level of speculation taking place in oil futures at NYMEX in New York and ICE Futures exchange in London. As per one estimate, speculators have taken huge positions of more than 12,000 billion dollars which is roughly seven times of world’s annual oil bill of previous year(Source: The Economic Times). Since OPEC decides actual delivery prices on the basis of prevailing future prices, therefore, we (the oil consumers) are forced to pay an additional speculative premium. According to some experts Lamar Miller Texans Jersey , this premium is about 50 to 60 dollar per barrel.
The OPEC’s inaction
World’s top leaders including US President George Bush have requested OPEC to increase oil production and thereby check the price manipulation by speculators so that oil prices may come down and adjust to their natural level as guided by true demand-supply forces. However, OPEC is not interested in increasing oil production and thus leaving oil prices for manipulation by speculators.
Alternatively, Even without raising production OPEC can stabilize oil prices by completely disconnecting delivery prices from future market prices. If OPEC starts delivering oil at a fixed price for example @ 80 dollar a barrel, irrespective of future market prices, then even future prices will cool down immediately.
However, by not taking a positive step Brock Osweiler Texans Jersey , OPEC is indirectly supporting speculators.
Windfall gains to OPEC nations
In fact, OPEC has vested interest in high oil prices. At current price level of about 140 plus dollar a barrel, the OPEC nations will get 1,000 billion dollars extra, for same oil quantity, in current year compared to past year. And DeAndre Hopkins Texans Jersey , this amount is equal to India’s last year GDP i.e. the value of goods and services produced by 1100 million Indians in the whole year. And don’t forget, India is world’s tenth largest economy. In this manner, non OPEC world’s wealth is quickly transferring to OPEC nations.
Why Oil prices will not come down ?
We are bound to have high energy prices situation in future also because following factors which are working in favour of speculators today may continue in future as well :
1. The unwillingness of OPEC to raise production or disconnect delivery prices from future prices.
2. Low margin requirement in futures market is giving enormous financial leveraging to speculators. Currently, it is about 6 percent which means to take position of 100,000 dollar one is required to pay only 6,000 dollar as a margin. This gives speculators a financial leverage of about 16 times of their money.
3. The low cost of capital. Since last year J.J. Watt Texans Jersey , when US sub-prime (bad housing loan) crisis came to surface, the US central bank Federal Reserve has continuously reduced interest rates to save the real economy from going into recession. This low interest rate is a boon to speculators.
4. The constant depreciation of dollar against other major currencies like euro etc. is prompting speculators to hedge their dollars in oil futures. The trend of dollar depreciation may continue is a common perception.
All this shows that we, the oil consumers, are totally at the mercy of producers (OPEC) and price manipulators (speculators) and are bound to pay exorbitantly high prices for our energy needs. Moreover, recently OPEC Chairman has indicated that oil prices may rise to 150 to 170 dollar a barrel in coming months.
Damaging effect on global economy
In addition to quick transfer of non OPEC nations wealth to OPEC nations, these high crude oil prices will damage global economy seriously. As per an IMF research report Whitney Mercilus Authentic Jersey , a permanent 5 dollar a barrel rise in oil prices reduces world GDP growth rate by 0.3 percent(Source: Business World). It may be noted that last year world GDP grew by 3.7 percent. The rise of about 60 to 70 dollar a barrel in oil prices in last one year, if it sustains at these levels, will not only reduce world GDP growth drastically but may even trigger a global recession.
Due to slowdown in global economy, there will be large scale of job cuts across the globe and millions of people will become jobless. Grains, in larger quantity, will be diverted for production of more bio-fuels as a oil substitute Will Fuller V Authentic Jersey , which in turn will take already high food prices to newer heights. This will hit hardest the poor people. Millions of poor people will be forced to die of hunger. Out of desperation, many of them will indulge in food riots, a phen Study These Traveli.