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Oil in a Week – Is oil a strategic or a commercial commodity?
Published in AL HAYAT on 30 - 05 - 2010

Oil prices are fluctuating without any clear direction in the near term. Three weeks ago, they rose to about 87 dollars, then dropped back to 69 dollars in the past two weeks, before rising again to 75 dollars at present. The underlying reasons behind the movement of oil prices are various, and range between near-term variables and other medium-term ones. However, there is one fundamental question that comes to mind here: is oil merely a commercial commodity, just like other commodities of this type, whose prices change on a daily basis without any apparent reasons, or is oil a strategic commodity that has minimum and maximum price limits that it cannot cross for prolonged periods of time?
The media rely on near-term variables to explain the causes of the rise or decline of oil prices. For example, the reason could be a statement by an energy official about his expectations for the market, or a significant climate-related development in an important oil consuming market, such as the north-eastern states of the United States. It could also be Chinese economic and oil policy decisions, or the increase of U.S commercial oil inventories. There are also geopolitical reasons that may influence the security of oil supplies, especially in the Gulf area. Here, prices may be influenced by a mere statement, even before a crisis gets worse. Then there is the impact of global economic conditions on demand, as in the case of the subprime mortgage crisis in the United States, or with the euro crisis currently in place. Finally, there is the issue of certain policies taken by major countries, whether oil producers or consumers, which decide for their own reasons, to increase or reduce prices.
These speculations are further fuelled by the absence of an official source that records and announces oil prices. The contracts and agreements between oil-exporting countries and oil companies are not usually public, and when they are announced, this is usually done against a benchmark crude oil price, such as against the North Sea Brent. Also, prices are announced through information that the journalists obtain from oil traders, and in this case as well, there is no official source for the prices.
In other words, the media plays a key role in surveying and announcing price values. Then, whatever the news agencies or specialized publications convey is quoted next by the media. And what makes matters worse is OPEC's decision to rely on external sources, including the media, in determining the production rates of member states; i.e. OPEC does not rely on official information that it receives from member states.
Whatever the causes of price fluctuations may be, it is difficult to identify the main factors behind daily price fluctuations. Moreover, it is possible that many factors converge at the same time, with some left unmentioned by the media, as journalists often are unaware of many hidden parameters. It is also very likely for price fluctuations to be caused by a rumour spread by a certain party in the market to serve a private interest.
In truth, the daily fluctuation of oil prices are pushing petroleum in the direction of becoming a commercial commodity traded by speculators, instead of being a strategic commodity that influences many international industries. Fuel is important in transport, while [petroleum] derivates are important in petrochemical industries and power generation.
Yet, despite overwhelming daily news on oil prices, such as the repetition, these days, of the belief that the increase in the dollar value leads to lower oil prices, oil remains a strategic commodity that imposes itself in the international energy industry. For example, we find that the strong competition exhibited by alternative energies (nuclear, solar or natural gas) calls for a minimum price threshold for oil, which must not be crossed for a long period of time, as the consuming countries are currently working on developing alternative energies in an attempt to improve their economies and compete with oil. This requires a relatively high price of oil to encourage the development of new sources of energy.
At the same time, there are some who find price increases above a certain level to be objectionable, as this would place further burdens on citizens, cause complaints in this or that country, or damage the world economy. These limits to oil prices and the latter's fluctuations within them mean that oil remains a strategic commodity whose prices range within defined limits, despite their daily.
It is clear thus that oil will continue to play a dual role. On the first hand, it is a commercial commodity, because of the sheer volume it takes up in international trade and because of the open markets in the global economy, which trade in and speculate on oil. And on the other hand, oil will continue to be, until further notice, a strategic commodity that plays a key role in industries worldwide, given its weight in the industrial sector, and the persistent attempts to develop alternative energies. This highlights the importance of pricing oil within well-defined limits that help the development of these alternatives.
*. Mr. Khadduri is an energy expert


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