ECON 2

Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?

http://www.time.com/time/world/article/0,8599,1901446,00.html

Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don't always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year.

The 12 member countries of the OPEC cartel voted in Vienna on Thursday to maintain output at current levels rather than increase supplies in order to bring some relief to consumers, particularly in the gas-guzzling West. The OPEC oil ministers, whose countries account for about 40% of the world's entire crude-oil supply, also renewed their commitment to stick to their agreed quotas, rather than ship extra oil, as they began doing last April when several members ignored their agreed output limits. OPEC leaders, many of whose economies are heavily dependent on oil exports, have struggled to stabilize prices at a level that suits their own economic needs amid falling demand and rising supplies. Prices had rocketed to a record level of $147 a barrel last July before plummeting to $30 just five months later and beginning a new climb. (See pictures of South Africa's oil-from-coal refinery.) 

Oil analysts believe OPEC's decisions on Thursday could help push oil prices even higher; oil futures on the New York Mercantile Exchange have risen 36% in just two months, to about $63.46 a barrel on Thursday. And that appears to be on track to achieve targets set by OPEC leaders. Saudi Oil Minister Ali al-Naimi — OPEC's key power player — said Wednesday that oil prices ought to rise to between $75 and $80 a barrel by the end of the year. "Demand is picking up, especially in Asia," he told reporters puffing alongside him as he jogged through the streets of Vienna. "The price rise is a function of optimism that better things are coming in the future." 

The economic recovery Naimi so optimistically predicts would certainly be vital to oil-producing countries, whose own economies would be imperiled by a drawn-out recession. Oil demand in rich countries has crashed since the onset of the economic crisis last year, and is now at its lowest level since about 1981, according to the Paris-based International Energy Agency. U.S. oil inventories — the stored surplus — this month reached their highest level since the 1980s. And about 2.6 billion barrels are currently stored in commercial tankers around the world. "There is some risk we will run out of storage space in the next four to six weeks," says Simon Wardell, director of global oil at IHS Global Insight, an energy-forecasting company in London. To oil-rich countries that possibility evokes grim memories of 1998, when the Asian economic crisis sent demand plummeting, driving world oil prices down to $10 a barrel. "If we run out of storage it could prompt a collapse in the price," says Wardell. Oil producers might then choose to dramatically cut output in order to run down the surplus.

Despite such dangers, investors and oil producers are betting that global demand will roar back, apparently hoping that the recession has already hit bottom. Over the past two months, investors have plowed billions of dollars into oil futures. If the U.S. and other major industrial economies rebound, oil supplies could be depleted because the recession has prompted producer nations to freeze hundreds of projects to open new oil wells or upgrade existing ones. In the oil-rich Niger Delta, a major Nigerian government offensive against rebels has seriously disrupted production for several weeks. Venezuela's Oil Minister Rafael Ramirez said in Vienna that his country could not afford to invest in major new oil exploration unless prices rise further. "We need a level of at least $70 [a barrel] to recuperate investment," he said on Thursday. Muhammad-Ali Zainy, senior energy analyst at the Center for Global Energy Studies in London, says oil demand could increase quickly once the recession ends, especially as China has begun to build up its strategic oil reserves. "We think the price is going to go up gradually," says Zainy. 

For those feeling the pain at the gas pumps, however, there is one piece of good news. Oil is unlikely to hit $147 a barrel again — at least not during the coming decades. The U.S. Energy Information Administration said on Wednesday that oil prices would likely rise to $110 a barrel by 2015 and $130 a barrel by 2030. By that time the world oil markets might once again follow the normal rules of economics.

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Reaction

First off, I was really wondering as to why the title of the article was so. It seemed weird though we know for sure that such a thing exists in our economic lives as we all experience its diverse effects. If we indeed have a lot of oil supply in the global market then how come they’re making the gas price keep going up, up, and away? As if it’s never going to really go down. I’ve been a witness to much protest each year because of it. Though most jeepney drivers wouldn’t drive on the day of protests and oil price hikes still there would be some who would go on with their lives and take the wheel. Eventually, those other jeepney drivers would get back to work the following day because they realize that they can’t really do anything about it for now and if they don’t work they’ll not have anything to fill their needs. I understand why they would do those during the oil price increase. I feel pity for them. Were it not for their profession many of us would not be able to go about our day to day activities. It’s not really fair for their part. We take them for granted and they are the most affected when this phenomenon happens. 

I think we don’t really have much of the choice at the moment even though we want things to change and become more convenient for us since we’ve been in this situation of poverty and somehow deprived of the good things in life since our country’s been occupied by other nations. We do have the right to have happier lives yet with the way we are living as of this time and the way we conduct ourselves, I believe it is going to take a while before we could rise up from our economic status. I can’t blame anyone why they protest or increase the prices of goods and services. It’s not their fault why they do it. As if they really have much of a choice right now. We could at least be optimistic. It doesn’t mean that we have to be naïve or something. I’m just saying that good things will happen to those who would believe it would happen. I can tell that many would disagree with me about this but seriously it will happen. If we think that other countries are much better off than us, we may not know but they’re facing similar challenges with us. A friend of mine from the US told me that even they have a big debt to pay as a country. Let’s just be grateful that not many things happen in our country that happens to theirs. We wouldn’t make it were it to happen to us. Like terrorists that blow off skyscrapers. 

Overall, whatever economic crisis we may encounter in the next years or so, all it really takes is a little practice. We just started being on our own now and it’s reasonable that what our economy or society rather has undergone over the years is a way of saying that we’re just starting on managing the affairs of our country. There’s no point blaming anyone really. The prices of goods are still expected to rise so just bear with it. It’s going to be over so long as we keep working on it.