Thursday, May 22, 2008

Oil surges to record $135

Oil for delivery in July hit $135.05 in New York after inventories of crude in the US had their sharpest drop in four months. Brent crude oil also set a fresh record.

The news came as a a Nobel prize-winning economist warned that sky-high volatile prices in oil, food and a swath of minerals are now a permanent feature of the economy.

Oil workers in Jakarta - Warning over volatile oil prices
A surge in demand and poor production performance by Opec have contributed to the record oil prices

Michael Spence of Stanford University said that volatile commodity prices were perennial features of the modern economy, but were "worth suffering".

In a further sign that investors are betting on prices staying high well into the future, the cost of buying a barrel of oil for delivery in 2016 rose briefly above $142.

Analysts said that the rise in the oil price was down to a cocktail of factors, including strong demand from emerging economies and poor production performance by oil cartel Opec. However, in an unusual statement, the Bank of England dismissed claims that the recent spike in crude prices was due to speculation.

Prof Spence, the 2001 Nobel prize-winner, said the price rises in oil and in food, where crops have soared in value in the past year, were "a consequence worth suffering" of globalisation.


"It would be a mistake to view this as a one-time phenomenon," he said.

"This is a natural consequence of higher growth in many developing countries. This isn't just a story about food or oil - it could be about cement, about metals and a whole range of materials.

"Perhaps it will be minerals or uranium, or the costs of logistics and transportation. Either way, I would be very surprised if the relative price of oil and gas fell to the level it did in past years. The rise in energy is semi-permanent."

The warning from Prof Spence, author of a major new report on growth in developing economies, came as crude inventories in the US unexpectedly fell, triggering a fresh rise in the oil price.

The US Energy Department said inventories dropped by 5.4m, or 1.7pc, this month.

Analysts are split on how much of the current oil price reflects actual supply and demand, and how much is speculative froth.

Some suspect the recent rise indicates the oil market has become a bubble, however the Bank of England said in the minutes to its interest rate meeting earlier this month: "According to... market contacts, speculative purchases did not seem to be the prime cause of the recent increases in the oil price.

More fundamental demand and supply factors had probably been at the root of its steep rise during recent months".

It added that while prices were likely to fall back in the coming months, this was unlikely to happen within the "time horizon relevant for current monetary policy" - around two years.

Societe Generale and Credit Suisse have raised their oil price forecasts for this year, while Goldman Sachs warned recently that crude could soar to $200 a barrel.

Chancellor Alistair Darling has pledged to lobby Opec to raise its production levels, but the cartel has said a further increase is unlikely, adding that it should not be held responsible for high prices. It has said that $30 of the recent increase in the price of a barrel is due to speculation.

NVDL: Remember what we have been saying. The markets are "sleepwalking", "delusional" "not awake" "fanciful" "disconnected" - and all it has taken is a couple of intellectuals like Boone Pickens Spence and a few Peak Oil guys Like Kunstler to simply confirm, to breathe sanity into the markets. Now the public reponse will be to feel that reality is "not real" "incredible "not possible" "fanciful". There is still a lot of waking up that needs to happen, and probably a lot of nervous breakdowns. In the mean time our collective troubles are accelerating.

No comments: