Oil Prices Reach 18-month High
Posted April 27, 2010 at 6:55 am 
Filed in: Some weeks ago, this blog reported on the link between Greece’s economic crisis and world oil markets. Yesterday, a senior German banker told Bloomberg News that “The situation in Greece has an indirect impact on the oil markets through the U.S. dollar.”
Indeed, Brent oil in London hit an 18-month high yesterday at $87.75 per barrel. Brent is usually cheaper than oil traded on the New York Mercantile Exchange, but because of the dollar’s strength against the Euro, Brent is now trading at a $2.63 premium. Indeed, many analysts are reporting that the dollar is a principal driver of the oil market these days.
Meanwhile, oil up more than 60 percent from last year’s levels is fine by OPEC. Kuwait’s Oil Minister Sheikh Ahmad Al-Abdullah Al-Ahmad Al-Sabah (now say that five times fast) said that oil prices in the low $80s are “acceptable.” While “high enough to ensure investment in new capacity,” they “won’t hurt the world economy.”
According to the FT’s Energy Blog, OPEC will not officially raise output unless prices exceed $100 per barrel. The Centre for Global Energy Studies, a British consulting group, expects that prices may do just that. In any event, they do not buy OPEC’s warning of a weak second quarter. Instead, rather than focusing on the dollar, they expect a supply crunch and note in a recent report that OPEC’s $100 per barrel remarks “added further bullish sentiment to a market that was already digesting upward revisions to global GDP growth forecasts, record levels of Chinese imports and a continuing belief that non-OPEC oil supplies have reached a plateau, above which they are unlikely to rise.”
The details of the current situation – whether driven by the dollar’s strength, OPEC quotas, or China’s buildup of strategic reserves – point again to the underlying reality that simple market forces, that is, supply and demand, are all but irrelevant when it comes to the price of oil.
The diagram below, also from CGES, is a useful depiction of the oil industry’s evolution:
The current “hybrid model,” as they call it, is fundamentally unstable. Instead of relying on the invisible hand to deliver the oil our economies need, we are instead constantly subjected to volatile prices and unreliable, politicized supply.
It has been pointed out that Greece happens to have the world’s second highest rate of oil dependence. As a percentage of total primary energy, Greece’s 63 percent is second only to Ecuador’s 77 percent. Even Saudi Arabia, which relies heavily on gas, gets only 59 percent of its primary energy from oil. Countries like China, Brazil, and France, which fared relatively well during the recent recession, have considerably lower oil dependence, relying instead on coal, hydroelectric, and nuclear power respectively.
Oil dependence is economically damaging because it becomes extremely – and suddenly – expensive when prices rise. CGES, which provided the numbers above in a presentation last spring, also breaks down the global oil value chain for 2008:
In the face of rising costs and OPEC’s control of 81 percent of reserves, the only rational response from the developed countries is to diversify energy supply. That is, get transportation off oil. Europe has begun to do so with long-term high fuel taxes and strong incentives for more efficient and alternative-fueled vehicles. In keeping with its unique economic and political characteristics, the United States should follow the best course to reducing oil dependence, namely through expanding domestic oil supply while transitioning the light-duty vehicle fleet to one that uses electricity instead of liquid fuel.
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