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Answer:
Dear BuyandHolder,
Last
week we discussed a topic of interest and concern
to many BuyandHolders, why gasoline prices fluctuate
and how the price impacts on stocks. Click HERE
to read.
I
thought you would be interested to know a little bit
more about oil prices.
World
oil prices are actually the single most important
commodity within the whole spectrum of market movers.
As J.P. Getty, founder of the Getty Oil Company, was
fond of saying, "The meek may inherit the earth, but
not its mineral rights."
Oil
is preeminent because it's far easier to use than
any alternative fossil fuel. Only nuclear power plants
can compete effectively in producing power and they've
yet to be used except experimentally for automobiles
and ships.
OPEC
To
some extent, oil prices are determined by a cartel,
the Organization of Petroleum Exporting Countries,
more commonly referred to as OPEC. A cartel is an
agreement, written or unwritten, between producers
to fix prices, share markets or set production levels.
Market competition and/or antitrust laws often undermine
cartels.
Founded
in the 1960s, the current members of OPEC are: Algeria,
Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab Emirates and
Venezuela. The group, headquartered in Vienna, has
as its stated goal: to coordinate oil production among
the world's leading exporters.
That's
not an overstatement for approximately two-thirds
of the world's oil reserves are in the Middle East
-- and the Arab countries of the region that dominate
OPEC. To the extent that the OPEC nations cooperate
and do not cheat on their production quotas, they
are able to exercise considerable (but not total)
control of world oil prices.
Despite
its strength, OPEC's success has varied over the years,
largely because not all exporters belong to OPEC.
Among key non-members are Britain, Mexico, Norway,
Russia and the United States. (Several of these countries
have declined the invitation to join OPEC.) The fact
that these "outsiders" are also major producers, limit's
OPEC's control over prices.
Bottom
Line:
Crude
oil prices behave much as any other commodity, sensitive
to supply and demand. You'll find wide price swings
in times of shortage or oversupply. The crude oil
price cycle often runs for several years, responding
to changes in demand as well as the OPEC and non-OPEC
supply.
During
recessionary periods, for example, oil consumption
is reduced. Factories operate at a lower level; some
shut down. Air travel is reduced. Businesses and consumers
are more frugal in all of their expenditures.
When
the economy expands (by at least 3% annually), then,
according to the American Petroleum Institute, demand
for oil goes back up.
Note:
The next meeting of OPEC, which will be its 145th
meeting, will be held on September 11th. You may want
to follow news coverage of the event to get a look
at price fluctuations for the next six months to a
year.
For
More Information
OPEC:
www.opec.org.
This site has current prices as well as information
about oil production in member countries.
Bloomberg:
www.bloomberg.com.
This business information source has continually updated
details on oil prices.
Forbes:
The magazine has among the best coverage of the
current situation in the Middle East and the impact
of the war in Iraq on oil production.
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