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Speculators have made the price field slippery

(China Daily)
Updated: 2009-11-17 07:55

Prices of major crude oils have been rising since last month. The WTI crude oil price crossed $81 a barrel on Oct 21, sparking worldwide concern. (WTI, or West Texas Intermediate is a type of crude used as a benchmark in oil pricing and underlying commodity of New York Mercantile Exchange's oil futures contracts.) From then on world oil prices have fluctuated at comparatively high level and have increased even in the domestic market.

Theoretically, crude prices have risen because of lack of fundamentals' support. The current crude supply is enough and oil stocks are high compared to the weak demand worldwide. So why are crude prices rising? The increase is related to the financial attribute of oil in the international futures market, says Xia Yishan, a researcher with China Institute of International Studies.

Financial crises can influence oil prices. The global economy may not have seen real recovery, but the signs have been there. On the demand side, experts expect oil demand to increase when we step out of a (financial) crisis. On the supply side, major oil-exporting countries have reduced investment in exploration, development and processing of petroleum since the global financial crisis began more than a year ago. Hence, analysts' forecasts that oil supply will fall after economic recovery could also lead to an increase in crude prices.

Since crude oil has become a kind of financial product, its price is more likely to be determined by speculators in the international futures market than strictly by the law of demand and supply. The main reason why oil prices have risen this time is the short-term speculation in the international crude futures market, Xia says.

On the one hand, depreciation of the US dollar has meant higher prices for the dollar-denominated crude oil. On the other, the weak dollar has helped propel a huge amount of hot money into commodities market, especially the crude futures market.

In fact, it is not uncommon to see speculators manipulating oil prices in the futures market. The historical high price of oil ($147 a barrel) last year was the result of speculation in the crude market rather than the principle of demand and supply.

A reasonable oil price can balance oil-exporting nations' demand for profit and oil-importing countries' demand for consumption. A high oil price has a negative impact on the world economy, while a low price prompts people to over-consume, as well as thwarts the development of alternate energy sources. So, Xia says $70 a barrel seems to be a reasonable price for almost all sectors.

The road oil prices will take is still not certain. The global economy is still riding a bumpy path. Under such circumstances, speculators cannot fully control the oil futures market and drive up prices to extremely high levels. That oil cartels do not have much influence on pricing, because they do not determine the futures market, doesn't mean speculation is totally beyond their control.

In some cases, major oil-consuming countries such as the US and the UK have brought down prices by resorting to administrative measures in order to undermine speculation.

Oil price is expected to fluctuate between $70 and $90 a barrel for some time, Xia says. Though oil price is expected to stabilize after the global economy recovers from the financial crisis, it will still be above $70 a barrel.

All these factors show that there is no reason to blame China's high consumption for the increase in oil prices. China's demand for petroleum is justified given its large population, pace of economic development and rapid urbanization. Besides, China fulfills a huge majority of its energy need from domestic sources.

Related readings:  Oil price holds key for electric autos  Speculators causing oil price fluctuations, says NEA chief  Experts: Oil price may hike again in late June  Oil price system 'reflects world changes more quickly'

China may be the second highest consumer of oil in the world - after the US - but its per capita oil consumption is comparatively low. Statistics in 2008 show that its per capita consumption was less than two barrels, making it only the 18th largest consumer, below even many of the moderately developed countries.

So we should consider a country's oil imports rather than its actual consumption when we try to determine why prices have shot up, Xia says. China produces about half of the oil it consumes. Since that oil is not part of the global distribution system, it should not in any way influence prices in the international market. China influences global oil prices much less than the US or Japan, which have far smaller populations but import more oil that it.

Moreover, China has adjusted its energy policies, focusing more on the development of clean (wind, solar and nuclear) energy, because it is determined to reduce its dependence on oil and contribute to the fight against climate change.

The higher the oil price, the bigger the problem for China because it is still dependent on imports to meet its demand. But given its economic growth and strong foreign exchange reserves, it can weather the storm of rising oil prices for some time to come.

On the global front, too, oil prices cannot pull back the economy from recovery as long as long as speculators keep them within a tolerable range.