“Readers should note that the following article was written in July and based on the intervention of H.E. Minister Miguel Sebastián Gascón at the Jeddah Energy Meeting in June 2008. In the light of the events since then, it stands the test of time remarkably well”.

The price of oil is above $140 a barrel, the highest price ever. In real terms, the current price is almost 50% more than the highest price reached during the oil crisis of the late 70’s. Moreover, the rise in prices has been sharp, 100% in the last year and 500% over the past five years. Only during the first oil crisis was there a similar surge in prices.

There are two reasons inherent to the oil market that explains this increase. The first one refers to the strong growth of the emerging economies. Since 2004 demand from these countries has grown by over 15%. Nevertheless, this increase needs to be put into perspective since world demand for petrol has only increased by 5.7% over the past four years, compensated by a fall in consumption by OECD countries.

The second reason is the inadequate growth of supply. By way of example, Opec production between 2005 and 2007 was reduced by 100,000 barrels a day, as compared to an increased demand for 2.2 million barrels during this period. Surplus capacity in the industry has consequently fallen in order to increase short term production. Until 2003 surplus capacity ranged from between 3 to 6 million barrels, while between 2003 and 2007 this has dropped to a mere 1 to 2 million barrels, barely 2% of production. This means that supply is very tight, thus pushing prices up. By 2009 and 2010, however, the International Energy Agency expects a significant increase in surplus capacity owing to new projects and oil fields coming into production.

Notwithstanding the above, these two basic factors – supply and demand – do not fully explain the price increase of the past year. There is a third factor: a possible financial bubble. Certain aspects of the financial markets substantiate the possible emergence of this bubble. Since 2005 significant changes have taken place in the futures markets for raw materials. The beginning of the so-called institutional funds, as well as unduly lax regulations allowing too much leverage, have both fed this bubble. For raw materials as a whole and in monetary terms, investment in these futures markets has gone from 13,000 million dollars to over 250,000 million dollars, which means that it has multiplied by nearly 20 in scarcely four years.

In short, it is difficult to quantify what portion of the current price of oil corresponds to the speculative financial bubble and what portion to basic factors of the oil market. Besides, while these basic factors have been thoroughly identified, it is difficult to predict the emergence of factors that might “burst” this bubble. Until this happens, oil prices will continue to rise and the global economy will continue to suffer the ill effects.