OPEC logos galore. (image: consolsoils.co.uk)

Even as the price of crude sank by a dollar a barrel on Tuesday, certain members of OPEC began to chatter cheerfully of higher oil prices in the future, inciting speculation that, given a push from some of the group’s biggest producers, crude might soon approach $100 a barrel.

Early on Tuesday, Kuwait’s Oil Minister Sheikh Ahmad Abdullah al-Sabah described $82 oil as “fantastic,” predicting that even if oil prices increase, OPEC will most likely not adjust its production levels in coming months. Meanwhile, an official in Kuwait’s Supreme Petroleum Council remarked that OPEC “will not consider it an alarming event even if oil hits $100…”, while Libya’s top oil official, Shokri Ghanem, said last week that, “As long as (oil prices) are under $100 there is no need for (OPEC) action.”

According to the Wall Street Journal, a few aggressive OPEC members could be enough to send oil prices climbing. In fact some analysts, like Olivier Jakob, an analyst with Swiss-based Petromatrix, believe that OPEC’s recent comments constitute a “wink and a nudge” to oil investors looking to go long on crude. “While OPEC will blame higher oil prices on speculators, they are trying to sponsor the same speculation,” Jakob said on Tuesday.

Such remarks echo those long made by critics of OPEC, who have called the twelve-state organization a cartel. According to Ken Stern, a managing director at LECG, OPEC has always operated according to rather sinister intentions. “Recognizing that a cartel is an agreement among producers to coordinate prices and production,” Stern says, “OPEC fits this description because its members agree to produce under fixed quotas and to sell at fixed prices. This collusion among OPEC members has a major impact on setting global oil prices and determining levels of available supply.”

And while vague comments from a few oil ministers don’t necessarily mean that a price spike is imminent, the aforementioned OPEC-members’ recent remarks do signal an ominous change in tune. For months, OPEC has expressed contentment with oil prices between $70 and $80 a barrel. As recently as December, Saudi Arabian Oil Minister Ali al-Naimi asserted that such prices were in the “right range,” meaning that there would be no need to curb production in an effort to cut into supplies.

But even as Saudi Arabia continues to quell speculation on a price increase, some analysts remain worried. After all, a dramatic jump in oil prices could spell danger for the US economy. Recall this grim prediction from economist Nouriel Roubini, who warned that if oil were to once again reach $100 a barrel, the effect on the nation’s economic recovery would be severe. HeatingOil.com will continue to cover this story as it develops.

(image: marketoracle.co.uk)

If you’re the type of person who enjoys unhappy paradoxes, here’s a real pearl: persistent confidence in the global economy may actually be hurting the global economy. Fatih Birol, chief economist of the International Energy Agency, warned Reuters on Monday that rising oil prices, which are in part caused by optimistic traders convinced of a revived market, threaten to undermine the world’s financial recovery. If you’re the type of person who finds such paradoxes irksome or downright confounding, you are advised to skip the rest of this article.

The price of oil has more than doubled since the end of 2008, when the global financial system collapsed and a barrel of crude sold for only $30. Since then, many investors, eager to get things moving again, have eyed the economy for signs of recovery, perhaps mistaking strong financial reports from several bellwether companies for an indication that everything is well again. After all, increased business worldwide would mean a greater demand for oil, which in turn would mean that traders could begin selling commodities for more money. Discontent to wait for the sluggish market to pick up, some traders have already begun selling oil long, despite consistently low demand.

However, analysts have warned that driving up oil prices will ultimately hinder economic growth. As an article published last week by Fortune put it, higher energy and oil prices “could complicate recovery in an economy that, despite the tumult of the past two years, remains as consumer-driven as ever.” It doesn’t take an economist to spot the dampening implications of decreased consumer spending; when Americans expend 6 percent of their income on energy costs, they have less to spend on other goods and services. It seems no coincidence that as fuel prices rose 6.3 percent last month, the Consumer Price Index indicated that consumer prices for October were higher than last year despite numerous price declines. Given the recession, this figure does not bode well for economic recovery.

Birol has joined a chorus of concerned financial analysts decrying inflated oil prices and their threat to economic recovery. None other than Nouriel Roubini, who in 2006 foretold of the global economic crisis and the unraveling of the housing market, has warned that skyrocketing oil prices spell doom for the global economy. “The price increase we have seen is too much, too fast,” Roubini said at a commodities conference in New York earlier this month. “If oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had last year,” he said, referring to the staggering price of oil just before the US financial crisis escalated into a global recession in 2008.

In a recent report, the IEA suggested that the run-up in oil prices between 2003 to mid-2008 played “an important, albeit secondary” role in the global economic downturn, as higher oil prices made oil-importing countries more vulnerable to the financial crisis. With Roubini-like prescience, the agency predicted in 2006 that inflated oil prices would “pose a significant threat to the world economy, by causing a worsening of current account imbalances and by triggering abrupt exchange rate realignments, a rise in interest rates and a slump in house and other asset prices.” Given that oil prices have reached $80 per barrel, this is not a heartening thought.

Members of OPEC’s leadership confer in March of 2008. (image: foreclosurepro via flickr.com)

In its monthly report for November, OPEC predicted a slight rise in global oil demand for 2010, citing as a cause the world’s economic recovery and, in particular, growth in emerging Asian economies including China and India, according to an Oil & Gas Journal article published on Wednesday. OPEC’s report is in step with recent forecasts released by the International Energy Agency (IEA) and the Energy Information Administration (EIA), both of which predict increased demand and higher oil prices in 2010, due in large part to a revived economy.

According to OPEC’s forecast, global oil demand will reach 85.07 million barrels a day in 2010, an increase of 0.9 percent, or 0.8 million more barrels a day, over this year. Specifically, OPEC predicts that demand will increase 3.7 percent in China and 3.34 percent in the Middle East, while dropping 1.25 percent in Western Europe. These estimates fall just short of the IEA’s monthly outlook, which sees crude demand in 2010 reaching 86.1 million barrels a day, an increase of 1.7 percent, or 1.4 million more barrels a day, and driven by a 3.6 percent surge in demand from developing countries.

It is OPEC’s belief that the world economy will continue its recovery, growing by 2.9 percent in 2010 after a contraction of 1.1 percent in 2009. China—one of the world’s most voracious oil consumers—is expected to grow 8 percent and 8.5 percent in 2009 and 2010, respectively. If economic growth and recovery lead to increased demand for oil (as OPEC predicts), then the price of oil will likely go up. The EIA forecasts that US crude oil will cost an average of $78.13 a barrel in 2010, up from a previous estimate of $72.42. Accordingly, by December 2010 the price of oil could hit $81 a barrel, “assuming US and world economic conditions continue to improve.”

Still, OPEC seems hesitant to paint a rosy picture of the oil market; rather, its predictions are full of cautious language, like those of the IEA, which stated this month that despite the fact that “the pace of demand contraction is clearly easing, the outlook for 2010 is still fraught with uncertainty.” In its report, OPEC suggests that world oil demand is unlikely to return to pre-crisis levels in the near future, warning that a sustained increase in the price of oil could hurt crude demand, especially given the shaky economy. This admonition has been stated by economists like Nouriel Roubini, who worries that inflated oil prices could hinder economic recovery.

Of course, there is also the matter of fuel distillates. According to OPEC’s report, despite a drop of 19.4 million barrels in October, US commercial distillate stocks are still abnormally high. Thus, “[w]hile a cold winter may provide support for product markets and encourage refiners to increase runs in the coming months, excessive levels of distillate stocks could further constrain refinery operations, impacting crude stock movements.”

Furthermore, OPEC’s analysis—which is based on the principles of supply and demand—may be inaccurate if, as some analysts have argued, the price of oil is currently more strongly affected by forces of the financial market. According to Daniel Yergin, for instance, “Oil prices today do not reflect the world’s supply and demand fundamentals.” Rather, it is the weakness of the dollar and an overriding faith in economic recovery that is pushing the price of oil up to $80 barrel. This theory—recently espoused by both Roubini and Exxon CEO Rex Tillerson—calls into question predictions made by OPEC and other groups like the IEA and EIA.

The price of oil (depicted, NYMEX per barrel performance, US$) has taken off in recent months, and its negative effect on economic recovery is now coming into focus. (image: markets.ft.com)

According to economic experts, rapidly increasing oil prices are taking their toll on American consumers and slowing recovery from the recession. On Wednesday CNN reported that the Consumer Price Index—the U.S. government’s primary gauge for inflation—indicates that overall consumer prices for last month were slightly higher than last year despite numerous price declines. How is this possible? The culprit is high oil and gas prices. During the month of October fuel prices rose by 6.3 percent, with oil currently priced at almost $80 a barrel—more that twice what it was at this time last year. And although current oil prices are nowhere near last summer’s prices of $145 a barrel, economic experts have recently expressed concern that recovery could be hampered if Americans have to continue to devote greater amounts of their paychecks to fuel. Looking at the recent CPI data, it appears that that feared scenario is playing out right now. As a Fortune article published yesterday put it, higher oil and energy prices “could complicate recovery in an economy that, despite the tumult of the past two years, remains as consumer-driven as ever.”

HeatingOil.com has been monitoring oil’s climb. On Friday, energy expert Jason Schenker, president of Prestige Economics, explained that oil’s excessively high prices are a result of optimistic traders investing as though the economy is quickly recovering and oil demand is high. Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, Inc, agreed with Schenker, asserting on Monday that current oil prices are not based on supply and demand but on faith in economic recovery and the weakness of the dollar.

If speculation, a weak dollar, and unjustified optimism in economic recovery are the causes of such high oil prices, the potential effects of the oil run-up are alarming. Rising energy costs naturally result in consumers spending more of their money on oil-based products such as gasoline and heating oil. According to CNN, current oil prices are pushing gasoline closer and closer to $3 a gallon. Economics professor James D. Hamilton warns that $3 a gallon is when “you start to see a change in behavior as budgets get squeezed.” To put it in another context, Hamilton asserts that Americans who spend $3 a gallon on gasoline are “are devoting 6% of their budgets to energy costs. Hitting that point in recent years seems to have prompted Americans to pull back.” Economics professor Nouriel Roubini agrees. On November 6, HeatingOil.com reported that professor Roubini believes that high oil prices could prove catastrophic to the U.S. economy, stating “if oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had last year.”

Another summer 2008 gas spike just around the corner? (image: _Faraz via flickr.com)

The CNN report also noted the link between the cost of oil and past and present recessions. Confirming the IEA report that said oil prices served as a secondary cause of the economic crisis, Professor Hamilton asserted that “the price of oil played a bigger factor in the recession than people seem to be remembering.” And Steven Kopits, managing director at energy market forecaster Douglas-Westwood, stressed the link between oil surges that have pushed U.S. oil consumption beyond 4% of gross domestic product and every recession since 1972. According to Kopits, the price that would push U.S. consumption to that point today is $80 a barrel.

Daniel Yergin joins other commentators who have said oil prices are not being driven by supply and demand. (image: cache.daylife.com)

“Oil prices today do not reflect the world’s supply and demand fundamentals.” That, in a nutshell, is energy expert Daniel Yergin’s assessment of why today’s $80 a barrel oil prices are double that of last year’s. On Monday Reuters reported that Yergin—who was awarded the Pulitzer Prize in 1992 for his book on the history of the global oil industry entitled The Prize: An Epic Quest for Oil, Money, and Power—attributes current oil prices to the weakness of the dollar and an overriding faith in economic recovery.

Yergin, who also possesses a PhD in International Relations from Cambridge and is the chairman of IHS Cambridge Energy Research Associates, Inc., agrees with many other renowned energy experts concerning the price of oil. On November 13 HeatingOil.com reported that energy expert Jason Schenker attributes the abnormally high cost of oil to optimistic investors who trade as though the economy is rapidly recovering and oil demand is high.

Commodities trader and analyst Stephen Schork, who is known for his unorthodox opinions on oil production and consumption, also agrees that oil prices are out of sync with supply and demand. However, Schork adds an interesting psychological element to interpreting the price of oil. According to HeatingOil.com, Schork attributes the price of oil to unfounded American beliefs that other countries, especially China, have begun consuming oil at unprecedented rates. The way Schork puts it, “the idea of a billion Chinese trading their Schwinns for Cadillac Escalades—I think that is what is driving the market.”

Also agreeing that oil prices are inconsistent with the laws of supply and demand is economics professor Nouriel Roubini. Professor Roubini has warned that such high prices are dangerous to economies that are only now beginning to shake the effects of last year’s economic crisis. Roubini, who predicted the crumbling housing market and subsequent credit crisis in 2006, has argued that what recovery has been achieved is in danger and “if oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had last year.”

The current state of affairs surrounding oil prices has not shaken Dr. Yergin’s faith in supply and demand, though. Asserting that “the only two real characters that count are supply and demand,” Yergin is confident that the market will eventually correct itself, and that supply and demand “will win at the end of the day.”

And although Yergin’s analysis of crude oil prices is not entirely positive, he may have good news for consumers of diesel fuel and heating oil. According to Yergin, supplies of diesel and heating oil are remarkably abundant—when the market does correct itself, customers will receive significantly lower prices.

(image: nypost.com)

Prominent economist Nouriel Roubini warned that rising oil prices are likely to hinder economic recovery, Reuters reported yesterday. “The price increase we have seen is too much, too fast,” Roubini said at a commodities conference in New York. “Part of the rise may be justified by global economic recovery…but going from $30 to $80 [per barrel] when demand for oil is down to 2005 levels is very difficult to justify.”

Over the last several months, US crude prices have jumped nearly 150 percent to above $80 after hitting a 2009 low of $32.70 per barrel in January. While many traders happily attribute the price increase to an improving economy, others have argued that oil’s latest rally is fueled by a weak dollar, speculation, and unjustified optimism. “Think what happened to oil last year,” Roubini said. “It went up not because of fundamental reasons like demand, but because of a bubble.” Indeed, crude inventories are approaching multi-year highs in the United States, the world’s biggest oil consumer, even as demand goes down.

“If oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had last year,” said Roubini, referring to the staggering price of oil just before the US financial crisis escalated into a global recession in 2008. “Today we have new bubbles because of a wall of liquidity created by the massive dollar carry trade,” Roubini told his audience on Wednesday, referring to investors’ use of a weak dollar to buy high-yielding assets.

Roubini, an economics professor at New York University, is best known for predicting the unraveling of the housing market and the credit crisis. In 2005, Roubini argued that home prices were riding a speculative wave that would soon sink the economy. In September 2006, he warned that the United States will likely “face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence, and, ultimately, a deep recession.”