Oil prices have recently risen to the new range of 75 to 85 dollars, amid the talk in petroleum circles (both official and unofficial) of the possibility that the prices may further rise and reach one hundred dollars. These developments occurred following a relatively long period of stable prices, which have hitherto ranged between 65 and 75 dollars, all throughout the summer (as of the end of June). Recall that the average OPEC Crudes Basket Price since the beginning of the year amounted to 57.91 dollars, compared to 94.45 dollars in 2008; this same average was at 67 dollars during the third quarter of the year. There are many reasons behind this recent rise in prices, such as the continued weakness of the dollar, and the increased investor confidence in the recovery of the global economy, which encouraged them to return to equity markets where indexes are now constantly on the rise. There is also the belief that the financial crisis that devastated the economies of major countries is now at an end, following the caution and hesitation that governed the expectations regarding the recovery of the global economy, and regarding the effectiveness of the billions of dollars pumped by central banks in boosting this recovery. This is not to mention the positive quarterly results achieved by the major American banks and corporations, which have been posted recently. Of course, no single vision unites as of yet the economic or governmental circles regarding the exact nature of the economic recovery being witnessed: On one hand, there are those who believe that a long period of time will have to pass before the world economy can return to its full vigour, and on the other hand, there are those who are saying that a full and quick recovery might be in sight. What is important here however is that there are multiple opinions being voiced regarding the expected timeframe for stability in the global economy to be achieved, and similarly, there are a number of differing views about the expected speed of this recovery, should it take place, and whether it will be slow or quick? Conversely, the rapid rise in prices has spurred a number of oil officials from OPEC to send out warnings regarding the reliability of these price hikes, and to question these latter. In fact, several warnings of a possible decline in prices in the future were voiced, since the statistics and data available to the oil producing countries do not indicate that a significant increase in oil demand is going to take place over the next year, despite the improvements seen in the global economy. Therefore, there is a general feeling that the current rise in oil prices is due to shifts in non-fundamental factors in the market itself, which may be essentially psychological in nature, such as the optimism regarding the recovery of the global economy, the persistent attempts at taking advantage of the weak dollar, and thus invest in oil, or the increase in oil demand in China but which is not being matched by a marked increase in demand in either the Western industrial countries or Japan. Thus, the unchanged demand levels, which are not expected to improve until 2010, remain a source of concern for the exporters. It is worth noting here that there is an agreement between OPEC's statistics - which indicate that the expected demand for the oil produced by its member states will be around 28.4 million barrels per day in 2010, compared to 28.36 million barrels per day in 2009- and the statistical forecasts of the International Energy Agency. These latter in fact also point out that the demand for OPEC's oil will reach 28.4 million barrels per day both this year and in 2010. What also is a cause of concern for the OPEC countries is the increase of crude quantities in the global commercial crude oil and petroleum products reserves, which have now exceeded the equivalent of 60 days of global demand, while the average was 55 days over the past few years. Currently, the market is being heavily affected by the importance of the exchange rate of the dollar in what regards the prices of oil and other raw materials, compared to the past when, for instance, it was news such those related to labour-related instability in Nigeria that would lead to hundreds of thousands of barrels or more to be withheld from the market, or similarly, whenever the situation between the West and Iran deteriorated regarding the latter's nuclear program, especially when accompanied by military exercises or war games, as has happened recently. While such news still affects oil prices, their effect is much less than that of the dollar's exchange rate. As such, what is happening now is that those investors who have large amounts of dollars are taking advantage of the relatively poor value of this currency, to buy oil or gold in anticipation of a hike in the prices of these commodities, all in order to realize huge profits from these transactions; also, they would have thus gotten rid of the dollars they have in their possession, as they are motivated by their fear of a further deterioration in its value. If we take into account that the value of the dollar has deteriorated by about 16 percent during the last seven months, we will be able to appreciate the dollar as an important factor as we try to understand the dynamics of the oil market. As for OPEC, it is doubtful that the governments of its member states will any time soon change their policies regarding the sale of oil in the dollar, because of the sheer magnitude of their foreign investments in this currency, in addition to many other political and economic reasons. * Mr. Khadduri is an energy expert
