OPEC chief insists speculation behind crude oil price rises

OPEC president Chakib Khelil again blamed speculators for the steep rise in oil prices, insisting that supply was not a problem. "There is no problem of supply, the problem is much more linked to speculation," he told a press conference. He also said the price of oil was closely linked to the exchange rate of the US dollar, which has fallen steeply against other major currencies. OPEC, which pumps 40% of the world's oil, is reluctant to bend to demands that it produce more to dampen the red-hot market. Analysts said recent speculative oil trading had been driven by tight global supplies, the weak dollar, unrest in key crude producers like Nigeria, and OPEC's unwillingness to boost output.

- Ah, the reason du jour. Every day there seems to be a new reason for the rise in crude oil prices. If you remember back in 2005, it was the hurricanes, then there were all the other reasons - Iran, Nigeria, the dollar, and now it's supposed to be speculation. Time after time, the media tells us that this or that crisis was supposed to add "x number of dollars" to the oil price, where x was some arbitrary number with absolutely no objective basis.

What is the "speculative premium" supposed to be - $4? $5? $10? Or are we supposed to believe that the cumulative speculative / dollar / Iran / Nigeria premium is actually over $110 since oil touched a low of $10 back in 1999? If that sounds like the most ridiculous thing you ever heard, that's because it is. There is no speculative premium. It is exactly zero dollars. There is always a long side (the buyer) and there is always a short side (the seller) in the futures markets. It is a zero sum game.

As legendary Texas oilman T. Boone Pickens puts it, it's all about supply and demand. We have 85 million barrels per day of supply and we have 87 million barrels per day of demand. Something has got to give, and that's what you see happening in the oil price as it continues to set new record highs on a regular basis. The faster demand rises relative to supply, the faster new oil price records will be set. That is what is really driving the oil futures markets.

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