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Analysis: Oil price-speculators link eyed

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by Krishnadev Calamur
Washington (UPI) Mar 20, 2008
Growing demand in Asia, political instability and the falling dollar have all been blamed for high oil prices, but many, including OPEC, increasingly see speculators driving the price of crude.

Rising oil prices, which climbed from just above $10 a barrel in the late 1990s to around $100 now, can be attributed to "political tensions and speculation rather than supply shortages," Abdullah bin Hamad al-Attiyah, Qatar's deputy premier and energy minister, told al-Jazeera this week.

That view has been echoed by others who say the value of the dollar, which has been hammered by other currencies, is leading to investment in commodities as a hedge against the falling greenback.

James Hamilton, a professor of economics at the University of California, San Diego, says market fundamentals -- strong demand and tight supplies -- drove oil prices between 2002 and 2007, but this year the reasons for the spike aren't the same.

"Not just oil prices but every storable commodity has been surging," he said. "It's a mistake to be looking into factors in the oil markets alone."

Hamilton said the Federal Reserve moved too aggressively to cut interest rates, which are now substantially lower than estimates of inflation over the next year.

This, he said, "gives additional incentives to commodity investors."

Not everyone shares this view. The American Petroleum Institute, the lobbying arm of the country's oil companies, says prices are driven by economic fundamentals of supply and demand. Other experts agree.

"Speculation is not influencing prices," said Robert Weiner, professor of International Business, Public Policy & Public Administration, and International Affairs at George Washington University in Washington. "They are high because of supply and demand."

He said: "In order to influence prices, speculators would all have to buy and sell at the same time. They don't do that."

Weiner attributes high prices to tremendous demand in the developing world: not only in China and India, but also the oil-producing nations of the Middle East, which are witnessing an economic boom. This increased demand is met with supply problems.

"We're running out of oil in countries where we can look for it easily," Weiner said.

Most of the unexplored oil assets such as the Outer Continental Shelf and Arctic National Wildlife Refuge remain off-limits to drilling. Among producing nations, Saudi Arabia is the only one with significant spare capacity. Producers such as Nigeria and Venezuela remain mired in political instability. There have been few major new discoveries, and most big oil companies are struggling to replace their reserves.

In such a situation, demand for oil remains high and most estimates have it priced at nearly $100 a barrel for the medium term.

It is these reasons -- not speculation -- that drive the price of oil, Weiner said.

Indeed, the Fed's move Tuesday to cut interest rates by 0.75 percent -- instead of the 1 percent many traders expected -- coupled with data Wednesday from the Energy Information Administration on higher-than-expected falls in U.S. gasoline and distillate supplies, pushed oil lower as fears mounted of an economic recession. The report from the EIA, the data arm of the U.S. Energy Department, also showed, however, that crude stocks increased less than expected by 200,000 barrels to 311.8 million barrels in the week ended March 14. Analysts were expecting an increase of 2.3 million barrels.

In its decision March 5 to hold production steady, the Organization of Petroleum Exporting Countries emphasized that it believed the market was well-supplied. It also noted that the global economic downturn was likely to cause a fall in the demand for crude.

"The current price environment does not reflect market fundamentals, as crude oil prices are being strongly influenced by the weakness in the U.S. dollar, rising inflation and significant flow of funds into the commodities market," the cartel said.

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