The oil price mystery – Vedomosti

“In the short term, politics determines the price of oil; in the long run, the law of supply and demand comes into play,” is how former Saudi oil minister Zaki Yamani described the price of oil decades ago. Yamani survived all the crises and triumphs of the oil market in the 1970s and 1980s. The oil embargo against Arab OPEC members in October 1973 was his idea; while the price of oil quadrupled within a few weeks. But he also always warned against too high a price level, otherwise demand would decline in the long run due to substitution.

What about market forces in the energy sector? The days when crude oil was physically traded between specialists at transhipment points from Rotterdam to Texas ended 40 years ago. In order not to carry high risks, price agreements have been postponed into the future. Buyers and sellers agreed on a future price. The so-called “paper oil market” was born. During the decade, the gap between the real, i.e. the physical oil market and the “paper oil” pushed forward by the financial market. When trading the digital stock market, fluctuations speed up or slow down within seconds. Emotions, but above all expectations, took the place of facts.

The first forward contracts, or “futures”, were for specific destinations and time periods, such as for heating oil. With the liberalization of financial markets, investors have become more involved in the oil business, betting on the future. In the summer of 2008, when futures pushed the price of oil to over $150 a barrel, some of these banks had about 70% of their portfolios in the crude oil business. It was about crude oil, not more products.

In the spring of 2008, economists were predicting prices well above $200 a barrel. Anyone who at that time spoke of speculation, as I did, was ridiculed as a critic of capitalism. But it was just a game played by “Wall Street refiners” – guys and girls at computers, far removed from reality in the oil fields and, above all, from market forces. Then the bubble burst as a result of the US banking crisis in October 2008. Oil prices plummeted, everyone was juggling unknown variables. If not for China, which at that time acted as the locomotive of the world economy, a much larger number of companies would have slid into bankruptcy.

Since then, the price of oil has risen and fallen even more depending on news from China, which for several years was the most important importer of oil. Thus, the dilemma that China finds itself in with its zero-tolerance policy for Covid also affects the price of oil. Whether people go to Chinese New Year in a few weeks or not will affect the oil market.

Unlike many Anglo-Saxon oil companies and investment funds, which bowed to the moral and then regulatory pressure called “down with fossils”, Chinese energy companies have invested in new fields. But the global investment deficit – “underinvestment” is squeezing supply.

The embargo on Russian oil, which the G7 and the EU have now added with their price caps, is putting pressure on the market. The market, which is determined by the suppliers, is subject to price capping by the buyers. This intervention causes alarm in all commodity producers. Today it touched Russia, tomorrow it can hit everyone else. And China knows this.

What will happen to the price of oil in 2023? Will it fall as a result of the recession? Will it rise because more wars start?

There are many types of oil, and the cost of extraction is very different, especially when it comes to conventional and unconventional reserves. The latter in North America are developed using costly “fracking”.

Will the average world price remain unchanged at $70 per barrel, will it fluctuate around $100, or, as predicted, will there be a new jump in the world market after the introduction of the ceiling on prices for Russian energy resources? You can only adapt to pricing if you think in scenarios.

But it is safe to say the following. The automotive industry will not be able to completely replace fossil fuels with electricity. And this is a determining factor, because most of the crude oil is used to supply transport with fuel. And if the German industry switches from gas to oil, it will also say a lot about the state of Western energy policy. Therefore, it will still be interesting to follow the price of oil.