All of us are hit hard by high and rising Crude Oil prices. Most of the nations, for their oil need, are dependent on OPEC (an organisation of 13 oil exporting nations). For OPEC nations, the production cost of one barrel (1 barrel equals 158.9 litre) oil is around 15 to 20 dollars(Source: Business Today).
Abnormal Oil price rise is due to speculation
Even though there is only 1.2 percent mismatch between demand and supply, the oil prices in last one year has doubled from about 70 dollar a barrel to 140 plus dollar a barrel. This abnormal rise in oil prices is a result of very high level of speculation taking place in oil futures at NYMEX in New York and ICE Futures exchange in London. Since OPEC decides actual delivery prices on the basis of prevailing future prices, therefore, we (the oil consumers) are forced to pay an additional speculative premium.
The OPEC's inaction
World's top leaders including US President George Bush have requested OPEC to increase oil production and thereby check the price manipulation by speculators so that oil prices may come down and adjust to their natural level as guided by true demand-supply forces. However, OPEC is not interested in increasing oil production and thus leaving oil prices for manipulation by speculators.
Alternatively, Even without raising production OPEC can stabilize oil prices by completely disconnecting delivery prices from future market prices. If OPEC starts delivering oil at a fixed price for example @ 80 dollar a barrel, irrespective of future market prices, then even future prices will cool down immediately.
Windfall gains to OPEC nations
In fact, OPEC has vested interest in high oil prices. At current price level of about 140 plus dollar a barrel, the OPEC nations will get 1,000 billion dollars extra, for same oil quantity, in current year compared to past year. Why Oil prices will not come down ?
1. The unwillingness of OPEC to raise production or disconnect delivery prices from future prices.
2. Low margin requirement in futures market is giving enormous financial leveraging to speculators. Moreover, recently OPEC Chairman has indicated that oil prices may rise to 150 to 170 dollar a barrel in coming months.
In addition to quick transfer of non OPEC nations wealth to OPEC nations, these high crude oil prices will damage global economy seriously. As per an IMF research report, a permanent 5 dollar a barrel rise in oil prices reduces world GDP growth rate by 0.3 percent(Source: Business World). The crude prices has taken world economy into a danger zone. Should we silently watch OPEC's inaction and oil speculators price manipulation? Since personal transportation accounts more than one third of global oil consumption, hence, our collective action will result in about 3 to 6 percent lesser global oil demand. As a result, crude prices will start downward journey.
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