Sometime this week the real price of a barrel of petroleum reached a new record when it momentarily surpassed the highest price set in 1980. Due to the fact that the main producers of crude petroleum are a concentrated club of countries, one sees this new price as a necessary boon to the countries and by extension, to their citizens. Yet it is not always so.
High prices may be good for producers but the economies of most petroleum producers are characterized by subsidies for petroleum fuels and other basic commodities. So while food prices have risen dramatically in countries that import petroleum fuels, these price increases have began to affect the economies of petroleum producing nations. This story in the NYT illustrates clearly the fact that producers of petroleum and other commodities are not immune from these dramatic inflationary pressures. The reason is simply because given its uses in industrial manufacturing and transportation, energy costs are a major driver of inflation in a large number of countries. Added to this is the tendency for most of the petroleum producers to peg their currencies to the US dollar which has been dominant world currency but is presently getting weaker relative to alternatives.
In order to forestall further unrest, the governments are taking the option of either extending the subsidies or raising wages for public sector employees. This is surely no solution because these subsidies can only be maintained for as long as the prices of crude petroleum remain high and the accumulation of reserves continues. What one can be certain of is that the prices cannot remain this high for the long term. Granted that there's no silver bullet, the solution lies in structural reform of these economies and yet this is unlikely when crude petroleum prices remains that high.
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3 comments:
deeply informative ,one wishes the bureaucrats of these oil producing states ,read it
Sadly the actual reason for the increase is not noted. It's the cost of oil 'At the Well Head'. Other than lease costs this is influenced bu the cost of equipment to explore, drill and produce the wellhead product.
One company NOV has been given substantial control of most of the equipment required for exploration. Yes, there are some small niche competitors but they can not compete an an economic scale. Margins of some critical equipment has escalated to more than 300% based on source supply.
One Company, Transocean Global SantaFe, operates a majority of the exploration fleet. One Company, The operating day rate for vessels more than 20 years old can be four hundred percent of the rate achieved when the vessel was built including amortization.
Keppel FELS and its subsidiary's construct the majority of new Exploration Vessels and much of the Production Equipment. Waiting list for a new rig can be two to three years. During that time the 'contract' may be sold at a substantial return.
People blame the war but this is the first time exponential increase in well head price have occurred in times of conflict. It is the first time single suppliers can seriously affect supply, hence prices, of a single commodity.
This isn't rocket science or in-depth risk analysis. Just observation of the market and review of oil costs in the 20th century.
Thanks Cherbonnier for an elaborate addition on the Well Head costs. To my mind though it is a significant contributor to the price of crude petroleum but cannot be the primary cause simply because exploration costs may be substantial but often do not constitute a very large proportion of the overall price of the barrel.
On the other hand, the mention of the monopoly equipment provider and operating corporations is an interesting fact. I would however tilt it the other way. the reason that demand for new equipment is high is because there's value in exploration coming from the high prices. I would also venture that if the prices of crude petroleum remained above the US$ 100 level, then there will be new entrants in the equipment supply and leasing industry.
Finally, the blog post did not mention the war at all principally because it is clear to me that demand side dynamics are far more responsible for the higher prices. I am less willing to agree with the supply side effects. The escalation of the cost of the critical equipment cannot really be the explanation for the US$ 55 to 60 rise in crude petroleum prices in five years.
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