Tuesday, June 10, 2008

Supply and Demand: When the Suppliers DEMAND More Than What is Warranted

It's the production of ethanol? It's the low supply? It's the war? Some or all of these reasons (or excuses) have been used to surmise why oil prices have increased dramatically in recent times.

In a recent Reuters.com article, Mohammed al-Hamli, the United Arab Emirates(UAE) energy minister, stated that the high oil prices are at ridiculous levels. The minister also said that the United Arab Emirates has spare oil reserves and enough production to help out with the supposed oil shortage.

The article goes on to state:

On Friday, U.S. crude jumped $10.75 to a record close of $138.54 a barrel, capping a two-day surge of more than $16 and stunning analysts who saw little fundamental reason for the spike.

"If you look at prices moving by $10 a day, that doesn't make sense," Hamli said.

"That's crazy."

It is fairly interesting that oil prices jumped so much while analysts saw "little fundamental reason" for the drastic increase. There also seems to be a problem when a government minister describes oil prices as "crazy." Since, as al-Hamli states, there is really no shortage of oil, why is the price of oil so high? One can only assume that it is being inflated by fears or suppliers. Although fear of a oil shortage seems to be plausible, the concept of suppliers artificially boosting their own market seems a lot more realistic, and like insider trading. Yet, there are no governmental agencies really playing hardball with these suppliers.

The oil prices affect the whole world economy, and since prices on the simplest commodities are skyrocketing, the international community should be pressuring for a 'oil-price-break.' Personally, I think oil supplies should be governed by different rules than regular commodities. Since virtually every country uses oil, and there is very few ways to get around using it to power cars, trucks, boats, airplanes, etc., prices should be regulated to an internationally decided level.

We need to start learning how to work together, rather than make the most money. Oil companies and suppliers seem to be only after one thing, and that is making the most money. So it is fairly easy to see that since the prices are increasing without any logical reason, it is only reasonable to look towards the suppliers to find out the problem. If oil supplies were ruled by an international committee, like the UN, I am sure that everyone would get their fair share. The only problem with that idea is that some countries like it the way it is, because they have more oil than others or are making exorbitant amounts of money.

If no one questions the source of the oil then there will be no change. As long as the big oil companies become richer, they will not worry about anything else.

(A good article on the paradoxical increases in oil prices in Europe can be read here)