Last week the price of oil touched for a short period of time the $100 mark for a barrel; No wonder the Italians refer to it as black gold. Malta and most of the EU were still in the Christmas holiday season and so there did not seem to be a great deal of panic as to how such a price could impact the economy internationally. In any case the price eased the following day following a shockingly weak employment report in the US, which did increase worries about a recession in what many consider to be the world's largest economy.
We need to appreciate that the hike in the price of oil did not occur overnight, but has taken around three years. Yet, from a so-called low point of just below 50 dollars a barrel in January, prices doubled last year to reach the $100 mark at the beginning of this year. As prices rose the question that kept coming up was whether the international economy could sustain such a price, as businesses could lose their competitiveness and consumers would have to dig deeper into their pockets to maintain their acquired standard of living.
The fact that we have reached the price of 100 dollars a barrel, has meant that somehow or other the price could be sustained. Worse still, Goldman Sachs, one of the most active banks in the energy market, said that the price could reach $105 by the end of this year. But what is driving the price of oil upwards? It is not only a question of demand as some would have us believe. There has definitely been an increase in demand for oil from Asia, notably from China and India, as their economies continued to steam ahead, literally, and therefore to guzzle oil.
However part of this increased demand resulted from a shift of operations from Europe and North America to these countries; hence the net increase in demand should not have been that significant. On the other hand the increased economic well-being in these two countries and others in South East Asia, plus infrastructural development, plus an increase in demand for transportation services did actually create new demand for oil. Now, there are some concerns about demand as the global economy is weakening and the outlook has been described by some analysts as "murky".
Thus the increase in demand did contribute to the increase in the price of oil, but does not explain the full increase. Other factors came into play, such as declining stocks. Stocks had been declining in the US for seven weeks and as such there were fears that the supply of oil could not match the increased demand. Fears on future supply are normally compounded by a lack of political stability in or around the countries that produce oil. And we know that we face a situation where the main producers of oil are not blessed with any long-term political stability of the kind we have grown accustomed to in the EU.
Pressure had been put at the end of last year on the Organisation of Petroleum Exporting Countries to increase supply, but this cartel simply ignored this pressure. In fact there are many who hold OPEC responsible for the surge in oil prices last year as it restricted supplies to reduce stock levels in industrialised countries.
Then there are the financial markets. The weak dollar and the fact that oil is traded in dollars has certainly helped to push up prices. However, we also experienced during last year what has been termed the financialisation of oil. Oil started to be increasingly used as an investment product by speculators and even pension funds, the latter normally being very conservative investors. As such it is now a commonly accepted view that the high oil prices are also due to such large financial operators taking a long-term position in oil as part of a larger investment portfolio. Some have called it a self-fulfilling prophecy as hedge funds stated that the price of oil would reach the $100 level, and in fact it did.
There are now those who question whether this is right. They question whether it is economically responsible for oil to have such a price tag. Are the various players in the global market of oil behaving responsibly in the way they make their money? Are they hindering the world economy from delivering its goods and services in an affordable manner for the benefit of everyone living on this planet? Are they contributing to a reduction in social harmony that we know the world economy needs for it to thrive? It is certainly not easy to provide answers to these questions, but we need to search for these answers in a very objective manner.