As the price of crude oil rises on world markets, complaints from consumers, industries and politicians are also on the rise. Some blame the Organization of Petroleum Export Countries, the cartel known as OPEC, while others blame unrest in the Middle East and North Africa and still others blame market speculators. Our Guangzhou Chengyue Engineering Group Co., Ltd. thinks there are many reasons which can't be explained in a simple sentence.
U.S. Attorney General Eric Holder has formed a Financial Fraud Enforcement Task Force Working Group to look into possible fraud in energy markets, but the price may be driven more by investment trends.
Energy analysts see some of the usual factors driving oil prices this year, including increased demand in rapidly developing nations like India and China, restrictions on drilling in some areas like the eastern coast of the United States and unrest in oil-producing countries like Libya. But petroleum has also become a favored asset for investors looking for future profits and their dollars sometimes distort the market.
Most investment money these days, from individual investors as well as from institutions, charitable groups and even governments, is now in various types of managed funds. Tom Kloza of the Oil Price Information Service says the managers of those funds can have a big impact on commodity prices, including the price of oil.
"Probably no one is breaking any rules, but a couple of key strokes by a money manager can move millions and billions of dollars into a market, and affect the price of something which is a life blood for consumers and people on the margins of society all over the world," said Kloza.
He says governments can't eliminate all speculation from the market, but that some kind of regulation is needed, especially outside the United States.
"I think that many of the moderates, the doves within OPEC, are very uncomfortable with where prices are heading, because if we keep heading at this pace, we will open the door for some alternative technologies that would otherwise need subsidies or some sort of government give outs," said Kloza.
"Back in the year 2000 the investing community as a whole made up about 10 percent of long positions in the oil market and now they are up to 40 percent," said Zeihan. "So you add that many new players and that much new money, but you do not add any more than a 10 percent increase in oil supply and, of course, you are going to have higher prices."
While that investment money comes from all over the world, Zeihan says one of the most significant contributors has been China, which takes in dollars from the United States and other nations that import its products. He says China has put much of that money into oil futures.
But the Stratfor analyst says the fundamental laws of supply and demand always win out eventually and then, as happened in 1998, 2001, and, most recently and dramatically in 2008, the price drops.
Zeihan is not predicting when that will happen. In the meantime, he sees signs that higher prices are encouraging more conservation and driving sales of fuel-efficient cars, but he does not see the development of an alternative to oil any time soon.
Zeihan says there is no other transportation fuel as dense in energy, as flexible and as easy to transport and use as petroleum. Natural gas from shale may help alleviate some of the U.S. demand, he says, but that will require a big investment in infrastructure. He says electric cars, recharged from power supplied by expanded nuclear plants, looked promising until the recent nuclear accident in Japan. For the foreseeable future, Zeihan says, the world depends on oil and consumers will have to put up with the frequent price fluctuations.