June 16 - 22, 2008

In recent months, oil prices have become increasingly volatile, mainly driven by financial market developments and the increased flow of speculative funds into oil futures. The turmoil in some global equity markets and the considerable depreciation in the US dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market. This has driven prices higher.

There is clearly no shortage of oil in the market. OECD commercial oil stocks remain above the five-year average, with days of forward cover at a comfortable level. US crude inventories, meanwhile, rose by almost six million barrels lately, which is a further indication that oil supplies are plentiful.

Opec member countries continue to produce at more than 32 million barrels a day (mb/d). In addition, a number of new Opec crude oil projects have started to come on-stream and Opec spare capacity continues to increase, with the figure currently standing above 3 mb/d. At the same time, crude oil movements indicate that some member countries are unable to find buyers for their additional supply.

A growing number of oil-market analysts believe that the soaring fuel costs is adversely impacting all the countries irrespective of being developed or developing. The factors responsible for the hike range from unrest in Nigeria to slumping production in Russia pushing oil prices closer new highs at unprecedented pace.

The seemingly unstoppable surge in oil prices has compelled some analysts to issue cautions. It has been predicted that the world may face a "super-spike" in which crude ranges from $150 to $200 a barrel, up from the current level. Even more unusual is that oil has maintained its upward momentum in the face of sharply diminished US demand.

"It's not that the genie is out of the bottle it's that 100 genies are out of the bottle," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Normally known for optimistic forecasts of lowering oil prices, Yergin's firm now says the price could rise to $150 a barrel this year.

As crude oil briefly touched its new high some analyst suggested the price might soon reach $200 many analysts are betting on nuclear power resurgence. However, the enthusiasm for a nuclear power faces many challenges that include financial, regulatory and waste storage issues, which highlights uncertainties about costs.

Other factors increasing the expense of construction include high demand for nuclear plants in emerging countries, along with limited supplies of reactor parts and increased prices for iron, steel and concrete. As a result, the estimated price of a nuclear reactor has more than doubled in less than a year, according to industry estimates.

Lately oil prices have shown some signs of ease due to growing concern that high prices may be starting to dampen demand. With WTI and Brent both showing sings of substantial retreat from record high of a little above $135/b. However, analysts say oil prices may resume their upward march. There are still plenty of supportive signals on the supply side.

Meanwhile, a report from the Centre for Global Energy Studies (CGES) says the market is not as balanced as Opec claims. The CGES said that global oil inventories are lower compared to last year, while non-Opec production was lower compared to last year. Perhaps the time has come for Opec to put its assertion that more crude oil will not help bring down prices. After all, they have nothing to lose if they are proved correct and everything to gain by silencing their critics."

A report in the Wall Street Journal, meanwhile, said that the IEA now believes oil supply will struggle to meet demand by 2030. The agency previously forecast that demand would rise to 116m b/d by 2030, compared with 85m b/d now. However, based on present investment patterns, the IEA thinks producers could struggle to raise output beyond 100m b/d.

In 1999, the price of oil hovered around $16 a barrel. By 2008, it had crossed the $100 a barrel mark. The reasons for the surge ranged from the relentless growth of the economies of China and India to widespread instability in oil-producing regions, including Iraq and Nigeria's delta region.

Triple-digit oil prices have redrawn the economic and political map of the world, challenging some old notions of power. Oil-rich nations are enjoying historic gains and opportunities, while major importers - including China and India, home to a third of the world's population - confront rising economic and social costs.

Managing this new order is fast becoming a central problem of global politics. Countries that need oil are clawing at each other to lock up scarce supplies, and are willing to deal with any government, no matter how unsavory, to do it.

In many poor nations with oil, the proceeds are being lost to corruption, depriving these countries of their best hope for development. And oil is fueling gargantuan investment funds run by foreign governments, which some in the West see as a new threat.

Countries like Russia, Venezuela and Iran are flush with rising oil revenues, a change reflected in newly aggressive foreign policies. But some unexpected countries are reaping benefits, as well as costs, from higher prices. Consider Germany. Although it imports virtually all its oil, it has prospered from extensive trade with a booming Russia and the Middle East. German exports to Russia grew 128 percent from 2001 to 2006.

In the United States, as already high gas prices rose even higher in the spring of 2008, the issue cropped up in the presidential campaign, with Senators John McCain and Hillary Clinton calling for a federal gas tax holiday during the peak summer driving months. And driving habits began to change, as sales of small cars jumped and mass transit systems across the country reported a sharp increase in riders.