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Why oil prices didn’t sky-rocket?

With global warming on the world agenda, there is no need for the oil price to go higher to incentivise oil exploration. This may be the reason for oil prices not sky-rocketing.

Oil prices sky-rocketed by 350 per cent after first oil shock in 1973 resulting from Yom Kippur war and the Arab oil embargo. Second oil shock in 1978-79 was caused by the Iranian revolution resulting in an oil price increase of 250 per cent. The Saudi outage of 5.7 million barrels per day is unprecedented, prices could have easily gone above $100/b; But they have not.  It has gone up by a mere 7 per cent even after one week making this a non-event. Why?

THE ATTACK and its IMPLICATIONS

On 14 September drones and missiles attacked on Abqaiq, the largest oil installation in the world and second-largest oil field Khurais in Saudi Arabia. These reduced the world oil production by 5.7 mmbd.The US and many countries were blaming Iran for the attack and were threatening action against Iran. Before the attack, EIA had estimated that the spare capacity is around 2.3 mmbd and most of it in Saudi Arabia. With the loss of 5.7 mmbd, current world spare capacity is now negative.

Within a day after the attack, Aramco declared that oil production will be restored by the end of the month. But for oil inventories held by Saudis in four export terminals at Ras Tanura, Sidi Kerir in Egypt, Rotterdam and Okinawa in Japan, no information on other OPEC inventories were available. Saudis had about 180 million barrels.

It was felt that the world will not suffer any shortage immediately since oil demand can be met by drawing on existing inventory.

The first day of trading soon after the drone attack saw a 14 per cent increase in oil price. However, after four days the oil price was slightly higher than what it was the previous week.

There could be many reasons for the market not to reflect the potential unprecedented supply/demand imbalance in the months to come. During the first two oil shocks, the oil industry did not have access to supply/demand information. Today we have much better information. Studies had shown very low short term price supply and demand elasticity. During the earlier shocks, market overestimated the loss shortage and prices sky-rocketed; oil demand was showing every indication of increasing at a rapid rate and oil supplies not being able to keep up (there was the fear of the end of oil era because of decreasing oil reserves). However, now we face an entirely different oil scenario. Peak oil is replaced by peak demand. With global warming on the world agenda and every chance of oil reserves being stranded like coal reserves, there is no need for the oil price to go higher to incentivise oil exploration. This may be the reason for oil prices not to sky-rocket as expected.

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