oil related 281007

Why predicting oil prices is a mug's game

By DIGBY LIDSTONE

A few days ago Shaikh Yamani gave a rare interview to the BBC. In it the former Saudi oil minister predicted that oil prices might peak at more than $100 a barrel, but in the long term they could just as easily drop back to the sort of low levels seen in the 1990s.

This is about as far from received opinion as you can get.

Most economists have been talking for a while of "a new paradigm" - a world in which oil prices settle into a stable price band of $50-60 a barrel.

But then again, these same economists were confidently predicting a $20-25 price bracket back in 2003, before oil prices started to climb. And climb. And continue to climb.

From the Gulf to the East Coast of the US, senior bank economists and oil market wonks scrambled to revise their forecasts.

With oil prices now edging into the 90s, you can hear the collective scratching of heads again. Should they hoist the price band higher? To $60-70, perhaps?

Whatever figure they pluck out of the air, you can be sure there will be a whole list of reasons they give to support their forecast.

On the one hand, there are the factors that keep oil prices high. These include declining fuel stockpiles in the US, the onset of winter or the American "driving season", political tensions, the growth of the Chinese economy and so on.

On the other hand, there are the factors that help bring prices down: an increase in Opec production, for example, or a declining US economy.

And just to complicate matters, there are the numerous unforeseen factors that keep oil markets on their toes: hurricanes in the Gulf of Mexico, or workers' strikes in Nigeria.

The list gets longer all the time.

Back in Shaikh Yamani's heyday - during the first oil boom and the 1973 Arab oil embargo - oil prices tended to reflect a simple formula of supply and demand.

Globalisation has complicated matters. These days, markets are generally more complex and have much fuzzier boundaries.

The use of futures contracts makes the picture fuzzier still. Because no trader really knows what events might influence the cost of oil three months down the line, any and every little piece of news today can have an effect.

Like the proverbial butterfly that sets off a tornado with one flap of its wings, a Turkish air raid in Iraqi Kurdistan can add 12 cents to the cost of a barrel.

At the end of the day, predicting oil prices is a mug's game.

Yet no economist would ever admit this. For a start, they would be out of a job. Because their real purpose is not to spin accurate forecasts, it is to conjure an atmosphere of confidence and calm.

Companies or governments need to be reassured that their latest multi-billion-dollar refinery or real estate project is going to work. They need to know the oil boom will last. They need to hear oil price predictions given in a strong, confident voice.

So it takes someone with the long experience and independent-mindedness of Shaikh Yamani to say that prices could just as easily go up as they could go down - to admit, effectively, that he has no idea what direction they might go in. But you can be sure he will say it in a strong and confident manner and he will charge you a hefty fee for his services.

Source: Gulf Daily News

‘Skyrocketing oil prices may derail economy’

* ‘Oil is the lubricant of economic expansion. A high oil price makes it more expensive for companies to operate and consumers to buy’

By Muhammad Yasir

KARACHI: Skyrocketing crude oil prices in the global market that touched an all-time high of $92 per barrel in the New York market on Friday due to rising US-Iran tension, pose a great concern to the economy of oil-dependent countries like Pakistan in near future.

Economists, while expressing their opinion to Daily Times, were in unison to say that the direction of a country’s economy depends on the movement of oil prices whether they go up or down. If oil prices move up persistently, then it will have a negative on the country’s progress as it has been forecast that the oil prices may jump above $100 a barrel if the market continues its jittery over the US move. And, all government’s efforts to stabilise the economy would result in naught.

“Oil is the lubricant of economic expansion. A high oil price just makes it more expensive for companies to operate,” said an economist requesting anonymity.

A high price for oil makes it more expensive for companies to transport goods from one place to another, and makes it more expensive for consumers to fill up their cars, and therefore they’ve got less money in terms of disposable income, he added. This importance makes the commodity one of the key aspects that economists look towards when judging consumer behaviour that in turn shapes business’ plans.

Crude oil has always been one of Pakistan’s major imports. During the first two months of the current fiscal year, the import bill for crude oil by 6.53 percent to reach $1.344 billion on a year-on-year basis but analysts believe that it will increase by 20-22 percent further if the current high oil price scenario continues. Economists predict that if the government had to increase prices of petroleum products i.e. high-speed diesel and motor sprit (MS) or gasoline/petrol in the retail market, it would also result in high inflationary pressures. Inflation, which is currently stands at 8.4 percent, is expected to reach eight percent by the end of the year against government’s target of 6.5 percent, said economist Samiullah Tariq.

Although petrol has a higher weightage of 0.98 percent than diesel’s 0.2 percent in general CPI, the actual impact on the economy would come from increasing the prices of diesel, as majority of the transportation (public and cargo both) depends on diesel. This is also evident from the consumption of 1.15 million tons of gasoline /petrol against 7.3 million tons of diesel.

Although, the government had subsidised diesel prices since March 2005 to control retail prices, it’s subsidy amount has increased from Rs 7.33 per liter to Rs 11.53 per liter with the oil prices hovering around $90 per barrel in global market during the last two months.

The government’s payables to the Oil Marketing Companies (OMCs) as price differential claims, an oil subsidy, will further rise to Rs 25 billion by the end of October.

This is not just it; high oil prices will show their harmful impact in a number of ways. Power production will become far more costly as furnace oil prices may shoot up. Industrial production will cost more. The prices of furnace oil stood at Rs 29,799 per tonne following a sharp surge of more than Rs 2,000 during the current month.

There are many industries, which still utilise furnace oil to run their machinery and are facing the burden of high cost of production due to increased prices in the international market. It is prudent to mention here that gas companies stop providing gas during four months during the winters to industries therefore they have to run their boilers on furnace oil.

Definitely, costs of running all means of transportation will high substantially. Railway fares will go up and airlines will raise their fares substantially. Agriculture sector will also hurt owing to the power rate for tube wells will go up making farm output far more costly. Higher power rates will affect the service sector including hotels, restaurants and shops. Power for schools, colleges and universities will cost far more.

All in all cost of living will be higher as the all the food items and essential necessities will become dearer due to the hike in oil prices.

The government’s policy of not passing this hike to the consumers is pressurising its fiscal abilities. This might derail all macroeconomic indicators. If the government does not pass on inflationary pressures to the consumer, then the current deficit account will widen further, interest rates will jump up and the government will face budget deficit at the end of the year finally, said renowned economist Asad Saeed.

As a consequence of being an election year, foreign inflows and privatisation receipts are also expected to slow down, he added. Pakistan has to explore its own oil reserve and promote alternate source of energy like natural gas and natural coal.

Source: Daily Times

Northern Iran holds plentiful oil, gas reserves, say geologists

Tehran Times Economic Desk

TEHRAN -- Recent research by geologists shows that north, northeast, and northwest of Iran hold bountiful deposits of oil and gas.

Iranian geologists have carried out a research in Gorgan, the capital of Golestan Province, that reveals the region has been very active in the first era of geology, said Mohammad Qavidel, a top Iranian geologist.

Microfossil studies prove that Gorgan region was nestled in a vast ocean in the middle of the first geological era, he said, adding numerous creatures in the ocean have caused huge oil and gas reserves to come into existence in Gorgan, Caspian Sea region, and even northwestern Iran.

Naming northern Iran as strategic, he said preliminary investigations in these parts attest to existence of huge hydrocarbon reserves.

Source: Tehran Times