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Page added on July 30, 2007

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Oil Prices at $70-80 a Barrel

The price of North Sea Brent has risen from $50 a barrel at the beginning of the year and recently crossed the record price threshold that was set last summer, during the Israeli war against Lebanon, namely $78 a barrel. It began to approach, for the first time, the level of $80, then fell to around $70.

What is behind this high level of prices?

First, there is the sustainable economic development in developing countries, such as China, and the big increase in demand for oil and oil imports, after China was an oil exporter at the beginning of the decade. It’s interesting to note that China has recently become the second biggest consumer of oil (more than 6 million barrels a day), after the US and ahead of Japan.
Second is a chronic lack of refineries in industrial countries, since they have not built sufficient refining capacity to meet the increased demand, along with the precise specifications to meet environmental-improvement requirements. This applies in particular to the US.

Third, the oil price increase in the last three years has not affected consumption patterns and levels. Despite the big increase, international energy consumption has remained steady, and has even risen on some occasions, due to the rise in the standard of living in many countries, and the increasing reliance on consumer goods that use energy.

Fourth, OPEC has constantly and closely followed market movements and has sought to avoid a repeat of earlier experiences of supplying markets with more crude oil for consumption and a commercial reserve than they actually needed, which led to a price collapse at the time. As is usual in such situations, when oil prices rise to record levels, both OPEC and the International Energy Agency (based in Paris, and representing the interests of industrial states that consume oil) issue contradictory statements about the reasons behind price increases. We see now that the agency is trying to accuse OPEC of not producing enough for the increase in the commercial reserve to record levels, while OPEC says that it cannot come up with a surplus energy capacity of more than 2 million barrels a day. OPEC responds, via its secretary general Abdullah al-Badri, and oil ministers in member states, that the market is receiving enough crude oil and that there are no buyers whose requests are being rejected, while the commercial reserve in the US and other industrial countries is at its highest level in years. OPEC also responds that it sees no benefit in supplying markets with additional amounts of crude, if there aren’t enough refineries in industrial countries themselves to refine the product, and that this is one of the reasons behind the price rise.

However, in addition to these economic factors, there are also political and financial factors at play.

Dar Al Hayat

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