Global demand blamed for rising oil prices

Oil prices have been spiralling due to the “inexorable” rise in global demand rather than because of speculators, British MPs were told today.

At a hearing into regulation of the oil markets, a number of industry experts told the Treasury Select Committee in England that never-ending political crises were also more likely to have an effect on soaring costs.

Last week crude oil topped 147 US dollars a barrel, up 50% since the start of the year alone and around double over the past 12 months. It has been a major factor in surging UK inflation, the official rate of which rose to a record high of 3.8% in June.

The rise in oil has led to accusations from some quarters, particularly unions and US politicians, that speculators have been behind much of oil’s unprecedented rise this year. Speculators buy up oil contracts to create artificial demand, hoping to profit from price movements rather than taking delivery of the commodity.

Former Shell UK boss Bob Reid, who is now chairman of one of world’s major oil exchanges, said global demand had risen by 12 million barrels a day over the past decade to 85 million barrels.

“Demand is growing and it is inexorable,” he said.

“As far as production is concerned, it’s becoming more difficult. The balance has become very tight.

“When there’s no oil around the frenzy grows and the price rises.”

He cited the “unbelievable” tension during recent months in major oil-producing nations like Nigeria – a major US supplier which has seen pipelines attacked – Iran, Russia and Brazil.

Mr Reid said: “Every day there seems to be something else.

“Therefore the market has continued to price high. It’s tried to come back, but everytime it’s tried there’s been another incident.”

He is currently chairman of London-based ICE Futures Exchange, which caters for around 45% of the crude oil market. There have been calls from US politicians for UK regulators to counter alleged excessive speculation in the London oil market.

Mr Reid said: “As far as speculators, we know there are financial investors in the market. These financial investors do put liquidity into the market and that’s a good thing.”

He added: “As far as we are concerned there’s no absence of information in this market. There’s no sign that there’s any manipulation that would constitute market abuse.”

ICE’s chief operating officer David Peniket said that between 500,000 and 700,000 “lots” – equivalent to 1,000 barrels of oil – were traded a day on the exchange.

He said: “The overall oil contract levels has come down over the past 12 months, which tends to counter the idea that there has been a large inflow of funds.”

Mr Peniket added that exchange bosses have not needed to ask any traders to reduce or close a position for suspected market abuse at any time in the past two years.

The committee heard there was no data on how big the OTC (over the counter) market in physical oil contracts and other oil-linked investments was. Estimates of its size ranged between half and the same size as the ICE Futures market.

MP Nick Ainger told Alexander Justham, director at the Financial Services Authority’s markets division: “Isn’t it time that you actually started looking at the whole market, and not just the futures market.

“What’s coming out about this is that there’s a lack of information.

“How do you know that there’s no market manipulation when one, you are not supervising and two, have not got all the market information?”

Mr Justham said: “There’s no evidence that there’s market manipulation outside of this exchange.”

Asked by committee chairman John McFall if oil was over-priced, US international business professor Robert Wiener told the MPs that the real cost of producing a barrel of oil was around the 70 dollar mark, but was trading much higher due to global political instability.

He said: “The oil prices are really a step-child of politics in many different countries. If your political problems are solved, then the oil price is too high. But given the political reality it’s hard to say that oil is over-priced.”

Dr Leo Drollas, chief economist at the Centre for Global Energy Studies, also cited a weaker dollar for oil’s surge. The US dollar has fallen around 16% in value against the euro, he said, prompting more investors seeking safer havens for their money than currencies.