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main factors driving the oil crisis

Mark Lewis from Energy Market Consultants explained in a BBC interview “We really don't know what the fundamentals are doing at any point in time; the markets are looking for signals from the fundamentals. Some of them are irrelevant, some of them are wrong, some of them are meaningless, but they affect prices nevertheless.” Sean Cronin, editor of Argus Global Markets explained “When the New York oil price broke through $100 a barrel for the first time at the start of 2008, one of the factors cited as being behind it was the assassination of Benazir Bhutto in Pakistan on 27 December 2007, that didn't strike us as making any sense at the time.” Hence there is a difference between the factors that raise oil prices because they affect sentiment and the ones that genuinely affect supply and demand for oil. This means hedge funds and the large investment banks in reality trade on rumour, not fact.

The speculation by hedge funds and Investment banks attempting to shore up their losses have been the main factors driving the oil crisis. There is however a number of other factors that have affected oil prices and will continue to shape the future geo‐political scene Refinery Capacity A major factor which will add to the Oil crisis is the fact there are little plans to develop Oil refineries. An oil refinery is an industrial process plant where crude oil is processed and refined into more useful petroleum products, such as gasoline, diesel fuel, heating oil, kerosine, and liquefied petroleum gas Oil refineries operate on a 'just‐in‐time' basis; this has affected the building of new refineries. The huge costs and the long lead times for building them affects decision making and as a result they are built only when they’re needed. Both oil and gas prices were relatively low during the 1980’s and 1990’s; hence very few refineries were built. The surge in prices in the late 1990’s was not expected to last hence refinery capacity did not increase ‐ since to finance refineries a 25 year forecast of supply and demand is used.

The rise of India and China happened too fast for an increase in refinery capacity; this is why over the past few years there have been refinery bottlenecks, which have contributed to the increased price in refined products such as gasoline, naphtha and jet fuel etc. Although Oil production has continued to increase and although consumption is set to rise, for the last 30 years very few refineries have been built across the world. The region that has the largest oil reserves (61%) and pumps 31% of the world’s oil – the Middle East, only refines 8% of it. 76% of the worlds oil is refined in regions with very little oil, but increasing demand for oil. The US refines 20% of the world’s oil, whilst Europe refines 22% of the world’s oil and the Far East refines 27% of the world’s oil. Hence even though the Muslim world has the lions share of oil, in essence this is useless considering the inability to refine it, for this reason most of the oil is piped to the Far East and Europe to be refined, then the products are sold to the Muslim world. The primary motive behind the lack of US refinery new builds was due to the low price of oil, new refineries would have been an expensive venture eating too much into profits. In the 1980s and 1990s, the fashion for American refineries was not to build more, but to close existing ones.

In 2001, Senator Ron Wyden authored a comprehensive report on the state of the US refining industry. He noted that between 1995 and 2001 there were a total of 24 refinery closures in the United States. Wyden uncovered several memos and internal documents from major oil companies that charted the way that capacity in the US refining industry was reduced to maintain higher profits. In Europe not only have no new refineries been built for two decades but there are no plans to build any in the future. There are no firm expansions in refining capacity, not just in the US but in North America, South America and Europe. All of the expansions are in the Middle East and Asia, by the time they come online oil consumption would have drastically increased. This has added to the price hike of oil and will play a key role in the future. Energy Geopolitics Although the current crisis has in large part been due to speculators moving out of the sub‐ prime crisis and into commodities there are however a number of Geopolitical factors and trends that will affect oil prices in the future. The age of oil, produced its own technology, its balance of power, its own economy and its pattern of society.
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