Oil price passes $100 a barrel for first time - close to 1980 all-time real dollar high; Price was at $10.72 in December 1998
By Finfacts Team
Jan 3, 2008, 02:17
The price of crude oil on the New York Mercantile Exchange (NYMEX) on Wednesday hit a record $100 a barrel for the first time, rising by more than $4 on the day. The price of Brent in London also hit a new record of $97.05, up $3.
Only one trade was made above $100 on NYMEX but it was a key psychological threshold and compared with 1998 when there was a glut of oil. On Dec. 10, 1998, crude oil futures fell to a low point of $10.72 on the NYMEX.
Analysts said that the price surge was triggered by violence in OPEC members Nigeria and Algeria, together with a decline in the US dollar and low level of US energy stocks at the peak demand period in the American North-East.
The falling US dollar boosts demand for dollar-priced commodities such as oil and gold, which also hit a new record of $859 an ounce on Wednesday, breaking the record that had been intact since January 1980 when it hit $850 after the Soviet invasion of Afghanistan and the Iranian revolution.
Oil rose almost 58% last year, the biggest annual gain this decade, after reaching a previous record $99.29 a barrel on November 21st as the dollar fell and US oil reserves fell.
The Paris-based International Energy Agency says the actual real-time record (inflation adjusted dollars) was reached in the spring of 1980 and is $101.70 in today's dollars.
The World of $100 Oil
A combination of increasingly difficult to access new oil resources as huge older fields face depletion; more success for the oil cartel OPEC in controlling supply; a surge in demand from Asia in recent years; increasing interest from market players in investing in oil futures and subsidies for consumers in many countries in the Middle East and Asia in particular, has underpinned the price.
In 2004, global demand rose by 2.8 million barrels a day, to 82.3 million barrels a day. Almost one-third of that growth came from China.
The Wall Street Journal reports that the number of oil-futures bets from investors outstanding on NYMEX has quintupled since 2001. Because oil has been rising at the same time, the dollars at stake in the main oil-futures benchmark, not including options, rose from roughly $7 billion in 2001 to more than $145 billion, calculates Ben Dell, energy analyst at Sanford C. Bernstein & Co.
As this surge of money chased a slowly growing number of barrels, prices sprinted upwards. And there is little to indicate that the conditions created by these financial commodity traders will push prices down anytime soon.
Market tightness will actually increase from 2009
Last November, Brazilian oil company Petroleo Brasileiro SA announced the discovery of a giant new oil field estimated to contain five to eight billion barrels of oil. If the estimate is correct, it would be one of the largest finds in recent years but such new discoveries take years to develop.
Last October, the key annual Oil & Money Conference was told in London, that shortages of skilled labour and long-term under-investment mean oil supplies are unlikely to meet the expected growth in demand over the coming years.
Nobuo Tanaka, the Executive Director of the International Energy Agency (IEA), the energy adviser to 26 industrialised countries, including Ireland told the conference: Despite five years of high oil prices, market tightness will actually increase from 2009. New capacity additions will not keep up with declines at current fields and the projected increase in demand.
He said that the IEA had revised up sharply to $5,000bn its estimate of the investment that the worlds energy industries would need by 2030 to meet rising demand. That is a 16% increase on the 2006 estimate of $4,300bn.
IEA analysts say that a sufficient resource base exists to supply demand through 2030, but Tanaka said he isn't confident there will be enough investment, skilled workers and technology to actually get to that oil "in a timely manner."
Andrew Gould, the Chairman and Chief Executive of Schlumberger Ltd., an oil-services company, said that 70% of the oil fields currently in operation are 30 years old. The growth in global demand since 2003, he said, has been roughly the equivalent of the daily output from two of the world's larger suppliers: the North Sea and Mexico.
Gould said that a 1.7% annual energy demand increase translates to the need for 11 million barrels per day extra oil by 2010.
Shortages of skilled staff and equipment such as drilling rigs have fuelled a steep rise in costs worldwide.
Matthew Simmons of Simmons, a US specialist energy investment bank, said 30,000 or more new staff would be needed to operate rigs now under construction. He said staff costs were rising at an average of 8% a year and by as much as 25% for some skilled staff areas.
Sadad I. Al-Husseini, an oil consultant and former Executive Vice President at Saudi Aramco, the kingdom's national oil company, warned that the major oil-producing nations are inflating their oil reserves by as much as 300 billion barrels. These amount to hypothetical reserves that are "not delineated, not accessible and not available for production."
Much of the production in the Middle East is from mature reservoirs, and the giant fields of the Arabian Gulf region, he said, are 41% depleted.
Global oil and gas capacity is constrained by mature reservoirs and is facing a "15-year production plateau," Al-Husseini said. He forecast that supply shortages will continue to add $12 to the price of oil for every million barrels a day in additional demand. Global demand, now at some 85 million barrels a day, was on average 10 million barrels a day lower in 1999.
Taking Andrew Gould's forecast increase of daily demand wiith Sadad Al-Husseini's estimate of an additional $12 per 1 million barrels, it's not good news for central bankers, business and consumers.
The US federal government says prices still haven't exceeded the January 1981 inflation-adjusted record of $93.09. The Paris-based International Energy Agency says the actual record was in the previous spring and is $101.70 in today's dollars.
Poster's Note: Hit the link for the full FinFacts article. I've parsed it a touch. Al-Husseini is not just some oil consultant. He's had a better inside perspective on whats really going on in Saudi Arabia than anyone else since he sat on the Board and was the #1 Exploration and Production guy before retirement. Don't ya just love retired guys? They can speak freely and what he's saying here (underlined above) is Saudi production is 'plateaued' and can't grow anymore. So for each mil bls a day that they global economy tries to grow, the price goes up $12/bl. This is a substantial revelation! Either its geologically true and/or the Saudis are allowing him to leak info to notify the world that they can't or won't continue to boost production from here. So factor in all the depletion going on elsewhere like Mexico. Saudi Arabia (nor anyone else) will be making up for these coming shortfalls. Yikes!
Our pending energy supply contraction= no economic growth= insufficient debt service= chaos + oilwars.