The changing price of Commodities
A few weeks ago the price of crude oil hit, $139 which is the highest crude oil has ever been. Today the price of is $135 but very soon the price of oil may be due to go up again! In ‘What's Driving the Oil Bull and How Much Further It Will Go?’ on the ‘Money Morning’ website they said the price per a barrel could hit $225 a barrel within next year. I know from my father who used to work from BP oil and Shell that the price of oil is like a yo-yo going up and down. The oil market is decided by the commodities market the result is if you look at any website looking at the price of oil over the last few years it will look something like this:
Oil is the fuel of modern society its price fluctuates if you look at the price of the over the last two years it even more confusing...
As you can see from January 2006 to October 2006 the price was between $65 and $55! Before it went right up!
As my father has always told me it's about supply and demand and today were entering a period where there will always be more demand than supply (source information New York Mercantile Exchange). An organisation which is an exchange commodities like for example crude oil. The result is you have hundreds of people in the room betting on how much of oil will cost and they work out how much we are going to pay (they also ask how much the oil price will change by guessing if their going to be a war causing a shortage of Oil an example is the First Golf war and the Iran/Iraq war of the 1980s). When you look on the New York Mercantile Exchange website http://www.nymex.com the prices are shown in black-and-white the problem is what are the results of these actions? Why and how do the prices affect the world live and work in today.
Well if you ask Saudi Arabia the World’s biggest oil exporter then they’ll give this is the reason why the oil price has gone up. In the business section of the daily telegraph on Monday, June 23, 2008 they talked about this issue on the front page. Later on in this blog there is a map where Oil is found. What most other places have in common like for example Nigeria were local people upset that they don’t have their fair share of the oil revenues attack the pipelines is conflict. It does seem that it only takes a spark that the oil price to leap up, if it does then life over the next decade could become very hard. As I read this article I quickly found out that there is also split in OPEC where Venezuela, Libya, Algeria, Iran and Qatar do not want to see an increase in oil production. First I asked myself is political reasons why these states act the way they do? Maybe the stated reason however is that this is more due to short term speculative investment in the financial markets and knowing how is priced does not surprise me.
I am going to start with why? The first issue I am going to come to is that it is not just oil. Recently in the news it was widely reported that China had obtained a mountain in Peru see http://www.mining-technology.com/news/news5317.html and the BBC website. The reason the Chinese obtained this property is that Mount Tormocho is made up of two billion tonnes of copper ore. This sets the Chinese government back $3 Billion Chinalco (the name of the company buying the mountain through) will be getting the copper ore for $410 per a ton (today London’s metal Exchange is selling the copper for $8,255. China is going to use the copper ore for wiring in its factories.
If you look on the mining technology website and you see dozens of stories about resources. Another example of a report from the same website is entitled ‘Rio Opposes Sharing Oz Railways’ again China crops up they mention that the rival firms because of interest in China and a growing need for iron ore want to use existing lines rather than have to build new ones. You may ask what has this got to do with Oil? Both metals and oils are considered as commodities as I explained before their price fluctuates and it now seems that the world is a race to obtain his resources as quickly as possible.
It’s not just mining in the Guardian’s G2 section on Wednesday the 25th of June 2008 there was an article about ‘Who had stolen all the copper?’. The fact is China’s thirst for resources and so big now that bridges between Germany and the Czech Republic are now being stolen. Church roofs have mysteriously disappeared as they contain copper. In fact the good old Guardian made a list of how much metal objects are worth! Examples are as follows Cast-iron from manhole covers scrap value £210-230 tonne, Lead from a church roof £275 tonne, Copper piping £2,500, Aluminium from Road signs £590-640, Iron from railway bridges £145 to 190 a tonne, Platinum from cars catalytic convertors £30,71 a gramme and Bronze from a ships value is £2,070-2,090. The result is China is acting like a vacuum cleaner sucking up all the resource they are looking for all the commodities. The problem with oil however is not only is the price of oil decided by the commodity markets but also where the actual oil is...
Just in case you think that you're reading the map wrongly you're not! The biggest reserves of oil in the world today are in Saudi Arabia 260 X 10 X9 bbI the country has reserves that should last for another 81 years. Canada which is one of the few stable countries on the list of large oil producers has reserves should last 182 years. The United States and Mexico are both near the bottom there reserves will last just over 10 years so you can see where the problem is and China is not even on the list. I have to say as a scientist and a trainee lawyer with a small amount of knowledge of international politics that most of the countries on the list I would not want to be buying oil from.
Most of the countries on the list are either in the Middle East (for examples Saudi Arabia, Iran, Iraq and Kuwait) all they are run by governments which are despotic example potentially Venezuela or in all but name are despotic like Russia. In the United Kingdom with often talked about the energy infrastructure the example of the recent problems is a clear indication of why we need to change the fuel we use. Just to make my findings clearing here is a table from last year.
Summary of Reserve Data as of 2007
Country Reserves 1 Production 2 Reserve life 3
109 bbl 109 m3 106 bbl/d 103 m3/d years
Saudi Arabia
260 41 8.8 1,400 81
Canada
179 28.5 2.7 430 182
Iran
136 21.6 3.9 620 74
Iraq
115 18.3 3.7 590 101
Kuwait
99 15.7 2.5 400 108
United Arab Emirates
97 15.4 2.5 400 107
Venezuela
80 13 2.4 380 91
Russia
60 9.5 9.5 1,510 17
Libya
41.5 6.60 1.8 290 63
Nigeria
36.2 5.76 2.3 370 43
United States
21 3.3 4.9 780 12
Mexico
12 1.9 3.2 510 10
Notes:
1 Claimed or estimated reserves in billions (109) of barrels (converted to billions of cubic metres). (Source: Oil & Gas Journal, January, 2007)
2 Production rate in millions (106) of barrels per day (converted to thousands of cubic metres per day) (Source: US Energy Information Authority, September, 2007)
3 Reserve life in years, calculated as reserves / annual production. (from above)
Meanwhile in other parts of the world like in South and Maritime Asia businessmen are rapidly turning fast swathes of rainforest into palm oil plantations. A good report to read is ‘Need for cheap palm oil drives deforestation’ By Paul Eccleston in the telegraph newspaper this report written late last year was before the present energy crisis but it shows just how desperate the problem could become. Another example is Athabasca Oil Sands just put those words into Google and you see a huge number of results. I would suggest if you want to know more you could not do worse than look at a two year old article from the BBC website ‘The great Alberta oil rush’ by Peter day. If you read the report explains that all oil needs to do is go above $60 and the oil Sands become worth exploiting well in a world where the average oil prices is $135 I think it is now safe to say that at least someone is making a killing on the commodity markets.
The result of the increase in the price of oil is both causing local and global. Recently I started thinking of moving out a friend recently offered to let him moving with them for a low rent. The reason being the price of living has been going up their gas prices for cooking and heating mean that they need to. On the Goble level the price of oil could destabilise many of the world’s states. One example is Egypt a state that in a few short years could be at war with herself. The BBC have a story called ‘Egypt Islamists' wait for power’ by Yolande Knell, BBC News, Cairoit talks about how Islamic brotherhood is the most popular party in Egyptian politics ( they are technically illegal) there have been waiting for decades to grab power from the ruling NDP. The increase in oil prices is now endangering the Egyptian state the government. One other article also from the BBC ‘Voter turnout low in tense Egypt’ from the 8th of April shows how unstable the country is most Egyptians are earning less than two dollars a day. If the Islamic brotherhood was to gain power in Egypt however the results would be disastrous. The Sinai peninsula is part of Egypt and backs straight on to Israel and Gaza (where due to Israel’s blockade of the territory weapons and oil are now being smuggled in) the result is the Sinai like predicted in the recent Egypt’s Sinai Question Middle East/North Africa, Report N°61, 30 January 2007 by the International by the renowned think tank Crisis Group . The result is that what in the developed world hard to control increases in the cost of living could cause international disasters in the developing world.
By Ian Rosmarin 24/5/2008