Volume 04 (2009, Week 04)

Calls for higher oil prices
The oil cartel and big energy firms say $50 per barrel for oil is too cheap to fund future investments.

The oil price has been falling steadily since July 2008, when it peaked at all-time-high of $147 per barrel (even when adjusted for inflation). Now it stands just above $40 a barrel for relief of many.

Now, bosses of OPEC and big energy firms such as BP and Royal Dutch Shell are calling for higher oil prices. This call comes despite the record profit of $31.4bn made by Royal Dutch Shell and $40.6bn profit made by Exxon Mobile for the year 2008, each setting record not just for themselves but for European Corporate and USA Corporate history respectively.

Abdalla El Badri, the Secretary-General of OPEC, said "A $50 price will not allow us to invest. If we don't invest now, then we will store up a problem in three years from now when demand picks up." Tony Hayward, BP boss, thinks $60-80 a barrel would allow firms to invest in for further exploration as well as meeting OPEC demands, which supplies about 40% of the world demand.

OPEC says it will cut down production if price continues to fall, as it thinks there is excess supply of about 2 million barrels per day (bpd). It has already decided to cut down its production by 1.5 million bpd in its October meeting last year.

However, in less than just 5 years ago, in June 2004 when oil price reached $42.45, the record at the time, countries were asking for increase in oil production. So has the price of exploration for oil have increased by that much in just 5 years? Surely the oil giants have been making record profits for the last three or four years that they can use their piles of cash to invest in for further development. Or have they simply got so used to high oil prices and easy money (I mean profit by easy money and not credit, as it has been the case for consumers in the last decade)?

It is true that the current price levels make some projects unviable, for instance many of Canada's tar sand oil projects are being postponed as a result of cheap oil prices and credit crunch.

In my opinion, it is important that world becomes less relient on oil by becoming more energy-efficient and investing more in renewable energy, such as wind and solar power. Unless we do so, we will be just postponing inevitable problem. If oil-producers get to have their own way, the only winners will be them and we will still be facing higher energy prices in the future.


OIL PRICE: The last summer's oil price hikes cannot be blamed on producers alone. It is largely to be blamed on speculators, mainly from commodity hedge funds. According to OPEC and Saudi Arabia, the world's largest oil-producer, there was not a shortage of supply in oil. Indeed, Saudi Arabia was running spare capacity of 1mn bpd last year (equivalent to 1.2% of world demand).

Speculators remain silent in general, those few who respond to media claim that they are not responsible for those price hikes and falls. According to Sean Corrigon, an English fund manager (called Diapason Commodities Management) based in Switzerland, speculators trades in oil count to only 5% of the total trade and claims that it is too small to have that much impact on the oil price. However there are two problems with his argument. First, 5% is not that small, considering that oil is a price-inelastic commodity (meaning large changes in price lead to small changes in its quantity consumed and vice versa). Second, 5% is likely to be the average value, therefore there could be much higher proportion of trade made by speculators during these roller-coaster period for oil price.



Ailing British Car Industry
On Tuesday, 27 January, Business Secretary Lord Mandelson announced £2.3bn help to troubled UK auto-industry.

Lord Mandelson emphasises that this new announced package is not a bail-out. He made it quite clear last year, that the government is not going to help all the businesses seeking help from the government.

The package is basically loan guarantees for car-makers, which are finding it hard to raise capital just as any other businesses. It is largely aimed at developing more fuel-efficient cars. £400mn is believed to go to Jaguar-Land Rover, which is owned by Indian Tata group now. Jaguar-Land Rover has been asking for £900mn to finance working capital and to invest in low-carbon cars.

The UK car-industry employs around 850'000 people directly and indirectly, manufacturing some 1.65mn cars. About three-quartes of the cars are exported, mainly to Europe.

The opposition says the package is too small to prevent job losses, which kind of contradicts their policy, as they have been opposing excessive government spending. But they may be right, as Nissan has cut 1200 jobs in its Sunderland plant, Jaguar-Land Rover cut further 450 jobs and Honda is suspending its production for four months. Even luxury car-makers are cutting back, Aston Martin has announced loss of 600 jobs last December.

It is unclear how UK auto-industry will come out of this recession, which has been struggling for decades, now all major players owned by foreign companies.