Oil Prices Break Record at $135 a Barrel

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Oil Prices Break Record at $135 a Barrel

Oil prices reached record levels this week

©iStockphoto.com/Henrik Jonsson

SUPPLY & DEMAND: The price of crude oil reached a new record high this week, topping $135 a barrel. Is this an "oil bubble," or just the sign of more to come?

by Mike Maxwell
Informify Staff Writer
May 23, 2008

The U.S. government's weekly gas and oil inventory report said supplies were lower than expected Wednesday. This news inspired energy investors to invest in oil, which drove the price up to its highest yet. Some pundits and analysts justify the price surge with supply and demand data, while others point to the nation's lagging economy and oil investment trends.

Oil Inventory Report Causes Buying Frenzy

The U.S. Department of Energy releases weekly reports on the nation's oil and gasoline supplies. Wednesday's report, covering the week of May 10-16, showed U.S. oil inventory was down 5.4 million barrels. Analysts had predicted an increase of 300,000 barrels during that timeframe. In addition, stocks of gasoline had dropped 800,000 barrels instead of increasing by the expected 250,000 barrels.

This unexpected news struck an already tense group of investors. The price of oil has:

nearly doubled in the past year
risen 18% in the past month

The unexpected shortfall drove the price of a barrel of New York sweet light crude over $135. Since that peak a few days ago, oil prices have dropped several dollars.

What's Driving High Oil Prices?

Two factors caused the higher oil prices:

concerns about supply and demand
investors joining a trend to make a profit

Supply and Demand

Our awareness of the world's dependence on petroleum fuels increases in light of the following:

instability in oil-producing regions of the world, such as the Middle East, Africa and South America
quickly expanding economies of India and China, where more and more people are able to afford cars
national security concerns about relying on a resource controlled by foreign governments or companies
data showing that our reliable oil sources are producing less oil, and that new sources of oil may be difficult to exploit
a growing social movement away from fossil fuels and toward renewable energy sources such as solar, wind, geothermal, and hydro-electric power
scientific data linking the use of fossil fuels with global climate change
higher gasoline prices

Old-Fashioned Capitalism

Like any other investors, people who invest in oil look for ways to increase the value of what they have. Observant investors watched the price of oil increase rapidly over the last year. These investors believe the price of oil will continue to go up for awhile. When they think the prices have reached their peak, they will sell their investments for a profit.

So far this year, investments in oil have outperformed investments in stocks and bonds.

Oil Bubble?

Do recent record oil prices reflect actual supply and demand trends in the U.S. economy? Opinions vary.

Tight Market Psychology: The same day the price of oil hit its record high, oil executives appeared before the Senate Judiciary Committee. According to these executives, the price for a barrel of oil should range between $35 and $90 even after factoring in the cost of oil production and supply and demand.

Victor Shum is an analyst for Purvin and Gertz, an energy consulting firm in Singapore. He believes the oil prices are artificial. "The psychology is that the oil market is tight," he said. "Even though there is no shortage, global oil demand continues to grow and supply growth is restrained." (Yahoo!/AFP, 5/22/08)

Demand Exceeds Supply: Demand continues to grow rapidly in China and India, where business is booming. Jeff Rubin, an economist and strategist for CIBC World Markets, said, "The story of the past month has been the sudden surge demand in China for diesel fuel... Even at $133, demand hasn't been reined in, and without a real raise in supply we think it's ultimately going to go over $200 a barrel." (Forbes, 5/21/05)

Future Supply Limited: There is also evidence to support the theory that our oil supply will not last forever. The International Energy Agency (IEA) is expected to decrease its estimate for oil production in the year 2030. Bill Ramsey, deputy executive director for the IEA said, "We are trying to get a better understanding of depletion rates and expectations of productivity. There is growing awareness that raising world output is a problem." (Bloomberg, 5/21/08)

Peak Oil: Advocates of the concept known as "peak oil" (see sidebar) point to current and historical information as evidence of an imminent slowdown in worldwide oil production. For example, the production of oil in the United States peaked in the 1970s and has declined since then.

Sources

Oil Rises Above $135 as OPEC Says It's Powerless to Stop Rally (Bloomberg, 5/21/08)

Oil prices breach 135 dollars for first time (Yahoo!/AFP, 5/21/08)

Oil: Up, Up, Up (Business Week, 5/21/08)

Oil's No Bubble (Forbes, 5/21/08)

Question for Readers:

Do you think oil prices are artificially inflated, or do they reflect the actual supply and production cost of oil?

What is “Peak Oil?”

The phrase "peak oil" describes the point at which world oil production begins to decline. Advocates of the peak oil concept believe there is a finite supply of oil available. These supplies will dwindle when the peak is reached, even though more and more energy and resources will be spent locating and extracting additional oil supplies.

When will peak oil occur? How will it affect us? Opinions differ among the pessimists, optimists and critics:

Peak Oil Pessimists

Peak oil will happen soon, if it hasn't happened already.
We rely too heavily on oil as a fuel source, so demand is still high.
The supply of oil cannot keep up with current demands, forcing oil prices to rise dramatically.
The global economy will likely suffer a painful setback as oil-based fuels become too expensive for many people or even governments to purchase.
The current global food shortage will only get worse as fuel becomes too expensive to run farm equipment or transport produce.

Peak Oil Optimists

There will be a peak, but not for at least another decade or more.
We will have time to transition to alternative energy sources before there is a major crisis.
New technologies in alternative energy and oil production will ease the peak's effects.

Peak Oil Critics

Not everyone believes there is such a thing as a peak to worldwide oil production: Critics say:

Oil supplies are not as limited as some think.
We will develop new technologies that will give us access to hard-to-reach oil.
We will naturally move away from petroleum as a fuel source, and move on to other forms of energy without encountering any kind of radical oil supply shortage.

(sources: Wikipedia, Jim Kingsdale's Energy Investment Strategies, theoildrum.com)