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Oil Market 'Saturated,' Iran Claims

Oil-producing countries say price hikes are not related to production

By Mark Huffman
ConsumerAffairs.com

June 13, 2008
Another OPEC member says there is no oil shortage. Iran's oil minister Gholam Hossein Nozari says the world's oil market is "saturated" with petroleum and there is no reason to increase production.

"There is enough oil in the market; there is no problem with oil supply and there is enough capability to supply as much oil as the global market has the capacity to receive," Nozari told IRNA, the official Iranian news agency.

President Bush has asked Saudi Arabia to increase oil production to help ease gasoline prices in the U.S., but the Saudis have said much the same thing as Nozari. Producing more oil, they say, would probably not affect prices much, if at all.

So, if there is plenty of oil, why do oil prices seemingly go up every day? Nozari didn't speculate on the reason, but only said market fundamentals do not support the present price of oil.

"Market fundamentals" refers to the actual cost of bringing oil to market, plus a supply and demand component. The views expressed by Nozari's and OPEC clash with the Bush Administration, which sees shortfalls in supplies as driving the prices higher. In one day last week, prices surged more than $10 a barrel when traders feared – incorrectly it turned out – that the U.S. inventory levels were lower than normal.

The price is set, not by OPEC or the oil companies, but by commodities traders who buy oil futures contracts on the New York Mercantile Exchange and other markets. Among the traders are companies in the oil business, who need to buy oil at the lowest price possible to turn into products to sell to consumers, like gasoline, diesel, and heating oil.

But increasingly, the oil industry traders are having to compete for oil with speculators, who hope to buy an oil futures contract on the assumption that the price will rise, and that they can re-sell it for a profit.

The Commodity Futures Trading Commission, the U.S. Government agency responsible for overseeing the trading of energy contracts, has been investigating possible market manipulation since last December.

In a statement, the CFTC said the recent dramatic increases in the price of crude oil traded on futures exchanges make its investigation even more important. It said new measures to promote transparency would improve oversight of the energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud.

Prices on the oil futures market have surged 32 percent this year and have increased fourfold in the last five years.

OPEC, meanwhile, has shown some interest in trying to regain more control over oil prices. Saudi Arabia has proposed a June 22 emergency meeting to discuss pricing issues. Iran says the meeting might prove useful, especially if it focused on the root causes of the oil price spike.

No relief

Guy Caruso, who is the head of the agency, told a Congressional committee that oil prices are likely to remain above $100 a barrel, which he said means consumers can expect gasoline prices around $4 per gallon through next year.

In the short term, Caruso said gasoline prices are likely to reach $4.15 a gallon in August but are unlikely to decline much after the peak. The EIA forecasts gasoline to average $3.92 a gallon through 2009.

High prices have reduced demand but the decline is not enough drive down the price at the pump, according to the government agency.

In the long term, government analysts expect new fuel economy requirements along with the use of ethanol by motorists to produce a substantial reduction in U.S. oil consumption and imports.

The agency projects oil prices declining to $86 a barrel in 2010 and then increasing to $107 by 2015.

New records

Both gasoline and diesel prices have set new records in the last 24 hours, according to the AAA Fuel Gauge Report.

A gallon of regular self-serve gasoline now sells for an average nationwide price of $4.052 a gallon, $1 over this time last year. Diesel sells for an average $4.792 throughout the country.

The price of both climbed almost a penny in the last 24 hours.

Mid-grade gasoline is also up almost 1 cent, selling for $4.303. Premium sells for $4.457 a gallon.

One year ago regular gasoline sold for $3.066 and diesel sold for $2.893.

Regular gasoline now sells above $4 in 25 states and the District on Columbia.

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