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The price of oil

By Veneconomy

Oil prices hit a new high this week when West Texas Intermediate (WTI) was traded at $ 44.15/barrel on the spot market. There are a number of reasons for this hike and no fewer the reflections that this situation should provoke. On the demand side, two major factors are the recovery of the U.S. economy and the accelerated growth of the Asian countries, particularly China. Supply has also increased. The OPEC is producing 31 million barrels a day, its highest level since 1981. What is more, inventories are at levels that are considered to be “normal” for this time of the year.

So, at the moment, supply and demand are in balance; but prices continue to rise anyway. It is estimated that today’s prices are $10 per barrel above what would be their balanced level. There are several explanations for this. First, there is the threat of a terrorist attack, which means that a considerable amount of production has had to be shut down - in fact, Iraq is producing below capacity precisely for that reason.

Then there is the fact that the OPEC does not have shut-down production capacity that could be activated in the event of a shock of this type, as it was wont to have in the past.

Added to that, there is the possibility that the Russian government could push Yukos Petroleum into bankruptcy, so removing some 1.2 million barrels a day from the market (equivalent to 1.5 percent of world production) for some days or weeks.

Even Venezuela is contributing to this climate of uncertainty. Speculation about what could happen with Venezuela oil supplies after the recall referendum on August 15 is also having an impact on the widespread nervousness in world markets.

The truth of the matter is that the price of oil could continue its upward trend and there are those who think that it could go as high as $50 per barrel.

These fears give rise to two comments and one reflection:

In the first place, the hike in oil prices is not as critical as it seems. Bearing in mind that, after adjusting them to take account of inflation, the fact is that oil prices are half the level they reached in 1981. Put another way, the peak price in 1981 was $80 per barrel in current dollars.

Second, the world is much better prepared today than in the 70s to cope with a crisis. Consumer countries have taken contingency measures in the form of strategic reserves and energy is becoming increasingly less important for the development of their economies.

All this analysis leads to an important reflection on what is happening in Venezuela. If oil production is at more or less the same level as in 1981 but the price is only half what it was then, the country IS NOT enjoying an authentic “oil boom.” So, even assuming that prices do not come down, it is crucial and urgent that other non-oil sources of income and growth for the economy be sought.

This omission is the biggest error in the Chávez administration’s economic policy.



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