Friday, 29 February 2008

What’s Really Driving the Price of Oil?

SPIEGELONLINE INTERNATIONAL: The price of crude oil has doubled, from $50 to $100, within months. The increase cannot be attributed to the fundamental data, which have hardly changed. And the looming recession ought to drive the price down. So why is oil getting more expensive?

Cushing is the kind of place where you'd expect to see a cowboy ride around the corner and tie his horse to a rail in front of the Buckhorn Bar. This sleepy town of 8,000 on the Oklahoma prairie comes complete with a main street that could double for a set in a Western. Its biggest attractions include a defunct train station and a run-down movie theater, where the price of admission is $1.50.

Robert Felts, a friendly old man who works for the Cushing Industrial Authority, likes to show visitors the historic oil pump in the middle of town. He tells the story of how, in 1912, a giant oil field was discovered nearby that placed Cushing on the map and showered it with more than two decades of prosperity. Up to 50 million barrels of oil bubbled out of the ground each year in those days. "Our refineries could hardly keep up," says Felts. To solve the problem, the oil barons of the day had large storage tanks installed in the surrounding prairieland.

There isn't much to talk about besides oil in this small Oklahoma town. But reports on the situation in Cushing get global markets moving at 10:30 every Wednesday morning. That's when US government officials publish a figure that reflects the amount of oil stored in the hundreds of tanks which now stretch for miles along the horizon.

Located at a key intersection in the North American pipeline system, Cushing is home to the largest oil storage facility in the United States. Oil traded on the New York Mercantile Exchange literally changes owners here in Cushing. If the tanks are full, prices sink. But if levels in these tanks fall, prices rise. A rule of thumb for traders: Supply and demand control the market.

Normally, at any rate. But in recent months the conventional wisdom has flip-flopped. Within a year the price of a barrel of crude has doubled, from $50 to last week's high of $100. Nothing seems impossible now. Some analysts see prices rising to between $120 and $150, which would have dramatic consequences for the world economy.

Similarly spectacular price developments have only occurred four times in the last few decades: in 1973, when the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo for the first time; in 1979, as a consequence of the Iranian revolution; a year later, when Iraq invaded Iran; and in 1990, when Iraq invaded Kuwait.
Which leads to one the most provocative questions being asked about the world economy today: Why are oil prices soaring again? What's Really Driving the Price of Oil? >>> By Beat Balzli and Frank Hornig

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