Over a Barrel

Source: BBC, Peter Day  (4/7/11)

"OPEC has lost its power to set the oil price and control it. That role has passed to the speculators."


Contemplating the turmoil in the Middle East and the fears that it will spread and infect the price of oil, it is sobering to think back 40 years to the start of the 1970s.

The oil price in 1970 was no more than two dollars a barrel, less than one fiftieth of the $100 price it has been hovering at in recent weeks (it went much higher in 2008).

One reason for the big jump is the way that the OPEC oil producers learnt to flex their muscles at the start of the 1970s. Hardly anyone had heard of the Organization of Petroleum Exporting Countries before the 1970s.

By the time the decade ended—after two great spurts in the price of oil—the Arab oil producers had discovered their strength, found their voice and become what many regarded as the bogeymen of international economics.

But short-term prices in the oil market are now dominated by the expectations of the financial futures markets.

OPEC has lost its power to set the oil price and control it. That role has passed to the speculators. Their ceaseless activities in the markets generate huge and confusing market noise. . .and cause huge gyrations in oil prices over the course of months, days or even hours.

Oil exploration companies have to take decisions to invest billions in looking for oil and then getting it out of the ground. The decisions will determine the decades of production, but the calculations about the likely profitability of a new oil field have to be taken amid huge uncertainties about the future price of oil.

No wonder oil companies insist they hate trying to predict the price of oil.