Friday, March 21, 2008

Mr. Caruso goes to the World Bank

A recent event from the World Bank on oil price volatility;

Arvind Gupta, Lead Financial Sector Specialist at the World Bank, introduced the main speaker, Guy Caruso, noting the many different perspectives Caruso brings to the topic of oil price volatility. Caruso, an Administrator in the Energy Information Administration (EIA) of the United States Energy Department, stated that the EIA periodically publishes reports on the subject on the state of the world oil market and provides analysis for hypothetical policy scenarios.

Caruso talked about the main drivers behind the prices of oil, stating that this is still explained by the fundamental principles of supply, demand, inventories, and productive capacity. He also cited the decisions made by the Organization of Petroleum Exporting Countries (OPEC) last year to reduce oil production as a factor that will continue to influence the market through 2008. Caruso noted the recent uncertainty about oil supply and demand due to geopolitical events, unprecedented global economic growth in the last 4 or 5 years, and even extreme weather events. In the short term, he said, these factors will ensure that oil prices stay high.

Caruso went on to cite the most recent report produced by the EIA, which indicates that in the coming years, there is a strong likelihood that prices will come down slightly. However he acknowledged that the present volatility of the market may lead to variations in these predictions. Caruso returned to the subject of OPEC, noting the reduction of the production of oil in 2006. In the last few months he explained, this production is again rising to meet growing demand.

Caruso pointed out that another fundamental driver of world oil prices in the last five years is the sharp reduction in spare productive capacity as a result of strong growth in the global economy, particularly in China. This, he said, has limited the ability of the world market to react to changes in supply or demand. The fact that spare productive capacity is now increasing might be one of the factors leading to a small decline in oil prices in the coming months. Caruso also explained the impact of the weakness of the US dollar. This, he said, is creating a widening gap in the price of oil for those who are paying with the stronger currencies relative to the dollar based countries.

Caruso noted the multiple sources of uncertainty in the world oil market, particularly the tensions with Iran and Venezuela and the state of the US economy. He also mentioned that while the continued inflow of money from hedge funds perhaps plays a role in the volatility, he does not believe it to be the main driver of prices. Caruso concluded by explaining the different projections outlined in the latest EIA report, pointing out that all the information is available to the public online.

In the question and answer session, audience members asked about what the prices in graphs meant in real terms, about the motivation behind OPEC’s interest in keeping prices of oil high, how prediction scenarios are estimated, and whether there are underlying assumptions of existing reserves in these predictions.

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