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Sun, 05 Jul 2009 | 07:23 GMT

Call for Oil Price Probe

 Iran Daily
 
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11 August 2008
The deflation of the oil bubble appeared to take hold in August, as economists identified a "monetary shock" from central banks and Iran called for a probe into the root causes of the price spike.

Iranian Foreign Minister Manouchehr Mottaki said the "root causes" of the oil bubble must be investigated before blaming producers for a price hike that sent a barrel of oil rocketing to $147 in 2008, Fars News Agency reported.

"Exactly at the very same time Saudi Arabia provided the market with a further 350,000 barrels of oil, we witnessed the increase in oil price," Mottaki told journalists in Colombo after a summit meeting of South Asian leaders who had raised concerns of an "energy crisis".

"It proves that the increase of oil and petroleum (prices) is not following the rules of demand and supply," he said.

New Heights
Oil prices have been bubbling since the turn of the millennium, but they rocketed up, along with food commodities, base metals and precious metals, after the subprime bubble broke in August 2007 and other central banks injected huge amounts of liquidity to grease gridlocked financial markets.

Oil and commodity prices raced to new heights in 2008 despite economic growth slowing worldwide while politicians and other analysts claimed there was a shortage of food and oil or that there was a global crisis of one commodity or the other.

"Commodity prices have to date remained strong despite signs of weakening economic activity," Simon Johnson, IMF's research director and economic counselor, told reporters after the release of the World Economic Outlook report in April.

"In fact, I cannot recall a time where I have seen such a striking dichotomy between global commodity and credit markets, each sending conflicting signals regarding the global outlook."

The International Monetary Fund has called it the worst bubble or 'boom' since 1973, when commodities shot up and the world faced an oil shock.

The 1973 oil shock was caused by excessive money printed by the US Federal Reserve to support the Vietnam war and populist spending of the Nixon administration, which caused the Fed to lose its gold reserves.

At the time, the Organization of Petroleum Exporters was widely blamed for the spike in prices, though very few questioned why soya prices went up so high that the US banned exports just like India banned rice exports during the 2008 bubble.

But in 2008, oil producers have started to point fingers at the US and Iran is calling for a probe.

"Of course, 30 percent of the increase in oil price are because of the decline in the value of the dollar," Mottaki said in Colombo. "And we support the holding of seminars and conferences to find the roots of these problems."

Oversupplied
Iran's OPEC Governor Mohammad Ali Khatibi said the global oil market is oversupplied but stronger winter demand should absorb the extra barrels later in the year.

He told Reuters that the oil market was responding more to fundamentals after a price slide of around 20 percent in less than a month drove out some speculators.

US crude CLc1 has fallen to a three-month low below $120 from a record $147 in July on concern that demand will suffer from an economic slowdown. Despite the fall, the price is still nearly $50 higher than a year ago.

"We have movement from two sides impacting prices," Khatibi said. "On the one hand, demand expectations are shrinking and, on the other hand, OPEC production is increasing and the result is clear.
 
You have weak prices."

Oversupply was about 1.3 million barrels per day but seasonal heating demand in the fourth quarter should balance fundamentals, he added.

Khatibi believes the market will be well balanced and there won't be any shortage in winter.

He declined to say if he thought the Organization of Petroleum Exporting Countries should change its output at its next ministerial meeting in Vienna on September 9. "That's for the ministers to decide," he said.

Beyond Control
OPEC boosted output for the third consecutive month in July as top oil exporter Saudi Arabia raised production to its highest level since 1981. The kingdom pushed its production to 9.7 million barrels per day, up from 9.45 million bpd in June in response to rising demand and what it saw as unacceptably high prices.

Saudi Arabia hosted emergency talks between consumers and producers in late June for addressing record fuel costs, which sparked protests worldwide and fed inflation.

However, Iran and other OPEC members stressed that the market is well-supplied and that factors beyond their control, such as speculation, a weakening US dollar, inadequate refining capacity and geopolitical tensions are behind the drive in crude oil prices.

Iranian officials blame sanctions that have been imposed against Tehran as a major contributory factor to the rise in prices.

© Iran Daily 2008

 
 
 
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