Reports on surging oil prices

There follows a news story by me from today’s Fund Strategy looking at the recent debate on rising oil prices. Three key reports on the subject have been published this month alone.

A key American government report has concluded that fundamental factors rather than speculation have driven up oil prices.* A task force from the Commodity Futures Trading Commission (CFTC) has reached the preliminary conclusion that: “Current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors”.

Over that period, it notes, the world economy grew at its fastest pace for two decades while oil supply growth failed to keep up. Global oil consumption grew by 3.9 percent from 2004 to 2007, driven largely by rising demand from emerging markets. Over the same period production growth from outside the Organization of the Petroleum Exporting Countries (Opec) countries was well below its historical average. Indeed, output from America, Mexico and the North Sea fell over the period. This imbalance between supply and demand is enough to explain the price surge.

Geopolitical unrest in countries with large oil reserves exacerbated the supply shortage still further. These included disruptions in such countries as Nigeria and Iraq and the threat of disruption in Iran and Venezuela. The task force also concluded that futures trading has not pushed up prices. If anything, speculators would have benefited more from price decreases than increases in recent months.

The CFTC’s conclusions are broadly in line with those of the International Energy Agency in its recent Medium-Term Oil Market Report (see Fund Strategy, July 7). In contrast, Opec in its World Oil Outlook 2008 argued, as have many prominent American politicians, that speculation is a key factor in pushing up prices (see Fund Strategy, July 14).

* Interim Report on Crude Oil. Available at www.cftc.gov