Fundamentals Are Driving High Oil Prices
Natalie Obiko Pearson wrote an excellent article IEA Sees World Oil Market Tightening for the online Wall Street Journal (subscription required).
"There is no clear sign of a recovery in crude oil [producing] capacity over the medium term," the energy watchdog said. "Despite a considerable downward revision to our global oil-demand forecast ... structural-demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture."
Current oil prices are an accurate reflection of those gloomy prospects, said the IEA. "Everyone wants a simplistic explanation for high prices. The reality is that there are a multitude of interactions" taking place, some of them involving structural changes in the world economy that have been building for many years, the report said in a new chapter dedicated solely to explaining the rise in prices.
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The IEA also weighed in on the debate over whether the flow of investment funds into the oil market have helped drive up prices. It said it recognizes that speculation can have a day-to-day impact on price moves, but believes current prices are justified by fundamentals. One reason it cited was that physical stockbuilding of oil doesn't appear to be occurring, whereas, historically, speculative bubbles have prompted hoarding of supplies in anticipation of higher prices.
I have written previously that fundamentals and not speculators are the root cause of high oil prices. Governments that want to meddle with the ability of investors and speculators to participate in the oil markets will create unintended consequences. The best course of action for governments is to ensure that trading is transparent and fair. Beyond that, governments should not meddle.
Permanently higher oil prices will have a profound impact upon the world. It will affect the political landscape. Venezuelan president Hugo Chavez, for example, will be sustained far longer than he should. And there will be economic consequences as people adapt their lifestyles to higher oil prices. The trick is to identify those companies that affected, either negatively or positively, by these changes.
As an example, consider the Yahoo! stock chart of AMR Corporation (AMR). Not a pretty chart, is it? There will be other causalities and winners as oil prices remain high.
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