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| WHY OIL WILL REMAIN VOLATILE The price of crude oil has risen by over 50% this year as compared to last year. A variety of reasons have been given for this rise in prices; high Chinese demand for oil, reduced refinery capacity in USA, terror threats to world oil supply. All this reasons fall under the three main factors that are currently affecting oil prices currently; demand, supply and speculation. The demand of oil has been growing at a faster rate than the supply of Oil. Demand has been growing at over 5% over the past 5 years while supply has been growing by less than 2%. China has been taking a larger share of the global oil supply. Currently, it is the second largest consumer of Oil in the world after the USA. Its demand is predicted to rise as more Chinese shift from bicycles to motor vehicles. Unless, there is a major economic downturn the global oil demand is expected to remain at the present levels over the next year. On the supply side, most of the oil producing countries are producing at or near full capacity. That is why OPEC (Organization of Petroleum Exporting Countries) was not able to do much to alleviate the recent increase in price. The cartel does not have the oil supply necessary to satisfy demand and consequently shift prices downwards. Since, supplies are tight in Oil producing countries, any disruption of supplies in any of the major producers will have a negative effect on global supplies and crude Oil prices. That is why any time there is a risk of oil supply disruption such as: sabotage of Nigerian pipelines, terrorist activities in the middle-east, the price of Oil rises in anticipation of decreased supplies. The other supply issue is that with the low oil prices over the past decade no major investment in the Oil industry infrastructure has been made. The low Oil prices did not justify heavy infrastructure spending. Therefore, the current infrastructure spending will take a while before it increases the industry's supply capacity. The other factor affecting Oil prices is the activities of financial speculators. They are aware of the supply and demand situation in the industry. They seek to profit from the fluctuations in the market. Due to the size of their financial transactions they have ended up affecting the commodity's price just like the supply and demand factors. Given that the supply of oil is relatively inelastic in the short-term the volatility in Oil prices will be with us for quite a while. www.geocities.com/smaleche/links |
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