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In general, the factors that affect oil prices include the basic supply and demand of oil production and consumption, geopolitics and emergencies, speculative factors, and the trend of the US dollar exchange rate. The factors that push up the current oil price are quite complicated. The relationship between the United States and Venezuela deteriorates. The domestic situation in Nigeria is tense. The relations between Iran, Iraq, and Turkey in the Middle East are becoming increasingly complex. Since international oil prices are denominated in US dollars, the rise in oil prices is also related to the depreciation of the US dollar. In addition to market speculators reluctant to sell goods, the Organization of Petroleum Exporting Countries (OPEC) does not want to increase crude oil production, which is one of the reasons for the rise in oil prices. People are more concerned about factors that affect short-term oil prices, such as geopolitics, depreciation of the U.S. dollar, speculation, etc., but ignore the basic supply-demand relationship of non-renewable resources.
Indeed, in the past, the jump in oil prices in each round has been based on special political factors. The two oil crises in 1973 and 1979 were mainly due to OPEC’s joint limited production and Iran’s sharp reduction in production, which resulted in the interruption of oil supply. The root cause of the 1990 oil crisis was also the stop of oil exports by Iraq before the Gulf War. Therefore, the three major crises and the jump in oil prices are basically non-market factors. Different from the previous jumps in oil prices, the rapid increase in market demand is the main reason for this jump in oil prices. The fundamentals of the supply and demand relationship make this round of oil price rises more sustained.
Since 2004, the strong recovery of the global economy has led to a large increase in oil demand. From 1999 to 2002, the world’s oil demand increased by an average of only 1.1% annually, and it also increased by 1.8% in 2003. By 2004, demand growth has rapidly increased to 3.4%, which is three times faster than the average growth rate in the previous decade. It is the largest in nearly 30 years. The United States increased by 2.8%, China and India increased by 13.7% and 5.5% respectively. Many people attributed this jump in oil prices to short-term supply and demand imbalances. In fact, we did not see a shortage of oil. It has been estimated that even in 2004, the daily supply of oil in the world market was still 1 million barrels more than the demand, indicating that there was no supply shortage in the market.
Due to the uncertainty of effective energy substitution, rapid growth in demand will increase scarcity expectations and scarcity expectations will drive prices higher. Therefore, there is no real need for energy shortages. The scarcity expectation itself is enough to push the rapid rise in energy prices. Crude oil futures rose by nearly three times from US$44 per barrel at the end of 2004 to US$126 per barrel in May 2008. The depreciation of the US dollar and geopolitics clearly cannot explain such a substantial increase. The rise in oil prices and the high demand for oil is not a simple coincidence. Scarcity expectations are also the main reason why OPEC does not want to increase crude oil production. OPEC has earned enough, holding the resources in its hands, watching the growth of market demand and anticipating future price movements. OPEC’s oil production stagnated, and Russia’s crude oil production rate has also slowed down.
Therefore, it is oil's high demand growth expectations that really lead to a jump in oil prices and remain high. For example, the "China Energy Threat Theory" is the expectation that the demand for "late" oil consuming countries such as China and India will continue to grow rapidly. This high demand is expected to be based on a number of basic demand factors such as rapid economic development in China and India, large population, very low per capita consumption, current oil consumption has just begun, and demand is rising. The amount will be very big.
Some people predict that by 2010, Asian oil imports will reach 20 million barrels, which will be twice that of the United States. The non-renewability of oil makes this high demand forecast naturally shift to medium and long-term oil scarcity expectations. When high-expectancy expectations turn into scarcity expectations, and driven by speculation, there will be a rapid rise in oil prices in this round.
Speculation is obviously a major factor in the short-term fluctuations in oil prices. At present, nearly 7,000 hedge funds are active in the oil futures market. Their trading volume is equivalent to 60% of the total transaction volume, and the control of funds may reach 1 trillion US dollars. The rise and fall of each oil price can be explained by analyzing speculation. Therefore, it is generally believed that the main culprit in pushing up oil prices and causing large fluctuations in oil prices is speculation. This is not wrong, but speculation cannot make oil prices continue to rise for a long time unless it is also based on scarcity expectations. Speculation can drastically fluctuate oil prices, but the supply and demand of oil is the decisive factor for international oil prices, because speculation ultimately also falls to supply and demand.
Things are rare and precious, oil is a non-renewable energy, high demand is expected to be high and scarce, and it is the basic driving force for sustained high oil prices. For non-renewable energy, pricing is based on the rate of increase in demand rather than the amount of consumption. With the rapid increase in the absolute demand and the corresponding reduction in reserves, it is wishful thinking that oil prices will decline as a result of a significant increase in production capacity, unless it can solve the problem of the production and cost of oil substitutes. Non-renewability determines that oil prices will fluctuate in the short-term in the coming decades, but the long-term upward trend will not change. High price expectations caused by scarcity will lead to a continuance or turn-up of oil prices. Even if there is a balance between supply and demand or a slight surplus, only major breakthroughs in technology or consumption patterns can prevent this situation.
The recent intensification of competition for access to petroleum resources around the world has allowed oil scarcity expectations to continue to increase. For most of the last century, the scramble for the world's oil supply was mainly between the United States, Japan, and Europe. Now, developing countries such as China and India have also joined in the struggle for oil reserves worldwide, and wherever they go, they move very hard and can't wait to be seen. Acquirers are often surprised to see the buyers. Competing, this is not only more than anything to explain the scarcity of oil prospects, it will also greatly increase the cost of oil resources.
Given the realities of geology, science and technology (oil substitutes) and international politics, it is indeed difficult for the oil supply to meet high demand growth and maintain oil price stability. Therefore, only a relatively small increase in oil demand can weaken scarcity expectations and reduce oil prices. In other words, all measures to reduce oil prices should focus on reducing scarcity expectations, which mainly include reducing the growth rate of oil demand and reducing the uncertainty of demand. In general, the faster the demand grows, the greater the uncertainty of demand. Therefore, reducing the growth rate of oil demand is the key. Due to the "rigid" nature of oil demand, the demand of developing countries ("late" oil consuming countries) will grow faster, and the weight of global oil demand will increase day by day. If governments' energy policies are inappropriate, even oil prices Without 200 US dollars, the possibility of continuing upward is also great.
Last week, nearly 100 members of the U.S. House of Representatives asked the Bush administration to suspend its oil reserve and provide more supply for the market. Even if oil reserves can be suspended, oil prices can only be temporarily relieved. Due to the non-renewability of oil, the rapid increase in demand will lead to tight supply and demand. Once the winds move, such as geopolitics and the depreciation of the US dollar, they will detonate the oil price.
China's economic development requires oil consumption, which is beyond reproach. However, considering the rapid growth in demand and the rise in oil prices, the government must take effective measures to increase the efficiency of oil consumption and minimize consumption growth. The most effective means is to increase oil prices. The rise in oil prices is beneficial to curb consumption growth and promote the development of alternative energy sources. In other words, if you do not want to increase the price of oil in the future, you cannot artificially reduce the current price of oil.
Although the current refined oil price control has its short-term macro rationality, it is not conducive to improving oil consumption efficiency and amplifies oil demand. In fact, the continuous soaring of international oil prices did not change China's consumption growth. In the first quarter of this year, China’s oil product consumption (sum of production and net imports) increased by 16.5% year-on-year, which was a historic increase. Crude oil consumption increased by 8% year-on-year. Compared with the same period last year, it accelerated 2.5 percentage points. This means that greater scarcity expectations and price pressures have become the driving force for further price increases in the future.
The article only represents the author's personal opinion and does not represent the position of the author.
High Demand Expectations: Jumping Rise in Oil Prices
On May 5th, after the first international oil price broke 120 US dollars/barrel, it further broke through 126 US dollars/barrel on May 9. Compared with the previous week's close, the price of oil in the New York market rose more than 8% a week. The prediction of oil prices is a matter of opinion. Some experts predict that with the arrival of summer oil peaks, oil prices may rise to 150 US dollars, and others think that 200 US dollars is the next threshold. People are very worried about the extent to which international oil prices will rise.