Oct 29, 2007

Why is Oil Prices so high?

Today, oil prices have soared to a record of US$93 per barrel which is roughly 40% higher than the price that is at the start of the year 2007.

Why is the Oil Price so high? What are the factors pushing it to the next level?

Many have said that wars around the world is one of the biggest factor. If you look at the latest military tension between Iraq and Turkey in northern Iraq, you will noticed the instability of the whole zone has created fears and uncertainty over the commercial future of the people, especially the business sector involving in the Oil and Gas Industry. The control over production, the fear of retaliation on the existing pipeline supplies, the reduction of manpower in war zones etc. have added to the slowing down of much needed production.

This unsecured political situation in northern Iraq is just one of the factors affecting the uncertainty in the Oil and Gas Industry, thus pushing the Oil prices sky high.

Next you find Iran, one of the major oil producers in the world, making demands on the Oil users like United States and Europe, to lay their hands off their nuclear programme, and to abstain from military attacks or threats of war. Iran could be using their influence in the Opec Council to push Oil prices higher with the intention of trying to crunch the users to their knees.

Then you have Nigeria's long history of civil war which has eroded the confidence of Oil companies in the country to invest in more drilling apparatus. Multi-national companies in the Industry have to house their platforms, offices, pumps and people in heavily guarded compounds to reduce the high incidences of kidnappings. Nigeria still has one of the largest untapped oil-fields in the world, but their unpredictability in the production of Oil has inflated the prices.

Is the Oil price going to increase further? This is a definite Yes.

When you have reduction in production and an equally insatiable thirst for more Oil in India and China, you are going to see a greater increase in Oil Price. This is basic supply and demand economics. India and China are liken to a race to outdo each other in economic expansion. With estimated economic growth of 8% in India and 10% in China, we are seeing an all-time demand for the much needed Oil energy as fuel for this economic engine.

However, the happiest lot of people seems to be the oil producing countries and their companies in the Industry, and that includes Petronas in Malaysia.

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