FACTORS OF GROWTH

"The time when we could count on cheap oil and super-cheap, natural gas is coming to an end," the maker of this gloomy forecast, made at a conference of representatives of the world oil industry in Houston in February this year, is the president of Chevron Texaco. One month later, it was confirmed by the President of Venezuela: "The world should forget about cheap oil."

Indeed, this year, especially its last few months, will stay in our minds for its super-high oil prices. Although they failed to reach the momentous level of 100-dollar - de jure, as it were, 99 dollars is a record that will have an impact on the economic situation in the world and individual countries for a long time. As a result of these high oil prices, OPEC reduced their oil consumption forecast from 1.3 million to 1.2 million barrels per day.

It must be noted that between1998-2005, the price of a barrel of oil soared from 10 to 50 US dollars. This gave rise to talk of the beginning of a new era of stable high oil prices. However, there is a view that prices are so high due only to a speculative "soap bubble" which might burst at any time. In order to establish which of these  is closer to the truth, we have to answer two questions: Why did oil prices soar? And what factors keep them high?

Politics above economics?

We have to take into account the fact that there is no single oil price: there are a number of oil brands, each of which is sold at a certain price. When the media write about oil prices, they usually mean two reference brands: North Sea Brent oil and Texas WTI oil (West Texas Intermediate). When OPEC countries discuss pricing policy, they operate prices for crude oil extracted in this region and sold at a price lower than the aforesaid brands.

Oil prices soar due to a various circumstances: insufficient supply, growing demand and financial speculation. Supply is largely regulated by OPEC by means of extraction quotas. Another factor that affects sufficiency of supply is a lack of oil on the American market. Since oil refineries cannot meet local demand, crude oil prices are increasing.

According to analysts at The Economist, another factor is the lack of reserves to enable an increase oil extraction. For a long time, OPEC countries have maintained considerable reserves as a means of minimizing fluctuations in oil supplies. For example, Saudi Arabia traditionally played the role of such a buffer, securing stable oil supplies during the Iran-Iraq war, the first and second Gulf Wars and the political crisis in Venezuela in 2003. Unfortunately, Saudi Arabia's unused reserves are gradually shrinking. In these conditions, even insignificant fluctuations in the balance of supply and demand might cause prices to soar.

There is no doubt that political factors have also played a role here: every child knows that many wars and conflicts in the modern world happen because of or are often "covered up" by oil.

For example, "thanks" to a statement by US Secretary of State Condoleezza Rice, who called on Europe and Russia to put pressure on Iran with regard to its uranium enrichment programme, prices started to rise again. Thus, the weakening geopolitical factor gained momentum, exerting influence on the market. An analyst with the Russian investment company Antanta Capital, Timur Khayrullin, says that Iran ranks third in the world for its proven hydrocarbon reserves, and instability in this region will definitely cause a fall in supply to the market, while demand is steadily growing. According to OPEC forecasts, demand will increase by 1.5 per cent in 2008.

According to the Bloomberg agency, OPEC members also link the hike in prices for hydrocarbon reserves to the falling dollar: oil exporting countries sell in dollars, while they often buy goods in euros.

"The soap bubble"

However, as we said above, some analysts are convinced that market games with oil prices are merely speculation which is quite profitable and is often supported at a political level. For example, the chief economist of the International Energy Agency, Fatih Birol, thinks that oil extracted in the Middle East should cost no more than 20 dollars per barrel.

The importance of such factors as hurricanes or accidents is often deliberately exaggerated by speculators on the stock exchanges in order to get as much revenue as possible from increasing oil prices. However, "speculation only exacerbates a situation that has developed due to limited oil reserves and political risks," the expert said.

It must be noted that according to a statement by the commercial director of BP Azerbaijan, Phil Home, the cost price of every barrel of oil extracted at Azerbaijan's Azari-Ciraq-Gunasli deposits is seven dollars. Of this, only two dollars is spent on oil extraction and processing and five dollars on transportation. Moreover, the cost price of oil decreases if the volume of oil extraction increases.

Thus, it is clear how much money is made if the price of one barrel of oil goes up by even one dollar. Of course, it is not only the extractive companies which are interested in keeping prices high. Many insurance funds, investors and oil companies buy oil because it is very profitable at the moment. It is clear that the countries which collect taxes from them (in this case, we are talking not just about the states where oil is extracted, but also about countries where a major company "resides") are also happy about the price hike. In other words, there are quite a few players interested in high oil prices. Does this mean that the current tendency will continue into next year?

Forecasting is not good business

World class analysts believe that high oil prices will be a talking point next year as well, in view of the unstable political situation in the world, the exacerbation of contradictions between some countries and OPEC promises not to increase extraction quotas. It must be remembered that on 5 December, Abu Dhabi hosted a meeting of OPEC oil ministers which decided to keep the volume of oil extraction at the existing level. Moreover, members of the cartel agreed to hold an unscheduled OPEC summit in January 2008 to discuss changes to the current level of oil extraction.

The oil and gas analyst, Timur Khayrullin, believes that there are factors which will help keep oil prices at a high level - these factors are the growing demand for oil (first of all, in China), the number of unstable regions involved in oil extraction (Iran, Iraq, Venezuela and Nigeria), the weakening of the dollar and the weighty role of OPEC, which is interested in maximizing its revenues in the long term. "At the same time, there are also factors that might cause a correction on the oil market - this is the slowing down of the US economy - the largest oil consumer in the world - and a possible lowering of interest of hedge funds in operations on the goods market. As a result, we expect the oil market to be extremely volatile and the average price of Ural oil to be 80 dollars per barrel," he said in an interview with Trend Capital.

The oil and gas analyst of the Alfa Bank, Konstantin Batunin, says that apart from supply and demand, oil prices are also affected by natural calamities. The oil market will also be greatly affected by the situation in the Middle East, especially in Iran. The average price of oil in 2008 will be lower than the current level. Meanwhile, according to the oil and gas analyst of the ATON Investment Company, Artem Konchin, the average price of oil in 2008 will be slightly higher than the current price. In view of the existing trend, oil prices next year will total 115-120 dollars per barrel.

The head of the hedge fund, BP Capital LLC, Boone Pickens, also thinks that oil prices will probably reach 100 dollars per barrel within the next six months. He pointed out that OPEC's decision not to increase the volume of oil extraction, which was adopted at the 5 December summit, totally coincides with his expectations. In his opinion, OPEC does not have enough capacity to radically increase the volume of "black gold" extraction. Meanwhile, according to Pickens, the world demand for oil is about 88 million barrels per day, while the volume of supplies is about 85 million barrels per day. Such an imbalance will inevitably lead to a price hike, in his calculations. Meanwhile, the secretary-general of OPEC, Abdullah al-Badri, says that there is no reason why oil prices should cross the mark of 100 dollars per barrel.

The deputy editor-in-chief of the Russian newspaper Kommersant, political expert Azer Mursaliyev, and the head of the Union of Oil Industrialists of Russia, Yuriy Shafranik, expressed moderate opinions on this issue. According to the former, there are two parallel tendencies today: the hike in oil prices and the fall of the dollar.

If the main factor that affects the rise in oil prices is the growth of consumption in such developing countries as India and China, the main factor behind the fall in the rate of the dollar is related to US policy. The main event of 2008 will be the elections in the United States. The current administration is most likely to try to create a steady basis for the work of oil corporations. This means that oil prices will remain at least at the current level. Shafranik also thinks that oil prices will not increase far beyond 100 dollars per barrel if the situation surrounding Iran does not deteriorate. "At the end of the last century, world oil prices were low. That they are increasing now is in reaction to new consumers, first of all India and China, and to the fact that prices were held in check for a long time. What is more, if prices are recalculated to reflect the value of today's dollar, the current prices and those of 1979-1983 would be compatible," he said.