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Oil Speculators Are Not to Blame

Written By Brian Hicks

Posted June 30, 2008

For weeks, oil speculators have been blamed for skyrocketing oil prices… but it’s not their fault. It’s a supply and demand issue.

Even Warren Buffett agrees. “In my lifetime, up until the last year or two, there’s been a huge amount of excess supply available,” he said. “We don’t have excess capacity in the world anymore, and that’s why you’re seeing these oil prices.”

Couple that with news that world energy consumption will rise 50% between 2005 and 2030, as demand in developing countries rises 85% and oil “worst case” scenarios become plausible.

And if you need further reason for an eventual rise to $150… $170… even $200, look no further than the Middle East.

Israeli-Iranian tensions over nuclear projects aren’t doing much to help. There’s a growing fear that in the event of war with Iran, the Strait of Hormuz (passageway for 90% of oil exported from Gulf producers) would be jeopardized. If that happens, we’d see an immediate oil super-spike.

Iran’s Revolutionary Guards has already said it would impose controls on shipping in the Persian Gulf and Strait of Hormuz, which accounts for about 40% of the world’s oil, if it were attacked.

But it’s just not us and Buffett pounding the pavement over supply-demand issues, big oil companies are agreeing.

Here’s more from Reuters…

“The heads of some of the world’s biggest oil companies countered on Monday OPEC claims that speculators were driving high oil prices, blaming instead a dearth of new supplies.

The chief executives of Royal Dutch Shell Plc (RDSa.L), BP Plc (BP.L) and Spain’s Repsol YPF (REP.MC) told the oil industry’s biggest gathering in three years that restrictions on where they can invest and high taxes meant they could not help boost supplies as much as they might.

BP’s CEO Tony Hayward said the argument that financial investors buying oil futures were behind a four-year rally that pushed oil prices to new records above $143/barrel on Monday was a “myth.”

He said the problem was a failure of supply growth to match demand growth. “Supply is not responding adequately to rising demand,” he told thousands of delegates at the World Petroleum Congress.

Repsol CEO Antonio Brufau agreed. “The fundamentals in the industry are the significant reasons for having these prices,” he said.

Shell Chief Executive Jeroen van der Veer said there was enough supply to meet current demand but that the market was tight and that many users were justifiably worried that future supplies will not meet demand.

Insofar as financial investors were involved in the market, they were only following such supply fears.

“We don’t think that the financial markets are leading the speculation, probably they follow what other people fear as long term fundamentals,” Van der Veer said. “I do not think that you can blame speculation for the oil price.”

Van der Veer said while the world’s third-largest oil company by market value did use energy derivatives it did not speculate on the oil price and that its net trading position was balanced.

Oil companies often hedge production but do not usually bet on the direction of the oil market, with the possible exception of BP which is considered the most aggressive trader among the majors.

Analysts at Goldman Sachs have dismissed the speculative bubble argument. “We find the concerns that commodity markets are in the midst of a speculative bubble unwarranted,” the investment bank said in a research note published on Sunday.

U.S. light crude was up $1.64 at $141.85 a barrel by 10:59 a.m. EDT, after a record high of $143.67 a barrel, supported by concerns over tensions between Israel and Iran over Tehran’s nuclear program.


Hayward said politics rather than geology was the reason behind anemic supply growth. “The problems are above ground not below it,” he said.

Brufau noted that 90 percent of the world’s oil reserves were in countries, such as Saudi Arabia and Kuwait, which restricted investment by international oil companies.

Despite falling spare global oil production capacity, OPEC argues that supplies are ample and that they are investing enough to ensure consumers will have the oil they need in future.

However, analysts say while the oil majors tend to boost their investments when oil prices rise, in the hope of lifting output and profits, state-run or national oil companies (NOCs) often do not respond to market signals.

NOC investments are driven by other priorities such as their governments’ short-term cash needs, maximizing long term returns and possibly management of the oil price.

High taxes have also limited investment, the executives said. As oil prices rose in recent years, producing countries from Russia to Venezuela have boosted oil taxes sharply.

Hayward said taxes were now ‘dangerously high.'”