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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