High oil prices have been making headlines along with the natural disasters of hurricane Katrina and Rita. Because a large part of the nation’s oil supply stem from the region both of the disasters raised fears of an oil crunch which in turn contributed to a large run up in crude prices, but beneath the disasters is the role of uncertain in run-up of oil prices.
Recent large movements in oil prices are fundamentally caused by uncertainty in the market for oil. Fears of not having enough oil supplies acts as a demand driver, because oil supply in the future are expected to decrease oil held today is more valuable. The possibility of tight oil supplies in the future adds an extra premium to oil prices. This extra premium is market forces pricing the possibility of an oil shortage.
Focus has been on OPEC, the Organization of Petroleum Exporting Countries grip on oil supplies. To maintain an oligopoly, thus extra profits, member countries have in place an export cap to oil importing nations. With run-up in the price of oil stemming from uncertainty and not a contract in the exporting of oil OPEC countries has been able to export the same quantity of oil with a higher price allowing even greater profits.
Recently OPEC has announced if needed they can supply an extra two million barrels of oil a day. This announcement by OPEC is to relieve part of the price premium of uncertainty in the supply of oil. But the announcement barely budged prices with the empty promise. Which means the market is assuming that OPEC ideal price target is above where oil prices are trading currently and they will probably not release more oil supplies in the future because of their expanding profit margin. Recent downward pressure of oil prices stemming from a better then expected hit on America’s oil producing region by Katrina and Rita. By removing uncertainty in future supply of oil the market will have a downward and stabilizing force in the price of oil