Oil Prices Climb Despite Saudi Arabia’s Offer To Lower Prices

Last Updated: 22, March 2012

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Oil prices are up 15 percent in 2012 and policymakers are starting to get fearful. After all, the recent financial crisis was exacerbated by the record high prices in 2008.

Despite Saudi Arabia’s oil minister promising to expand oil output by as much as 25 percent this year, the oil market remained unconvinced with Brent Crude closing at $124.43 on Wednesday.

Oil prices are up 15 percent in 2012 and policymakers are starting to get fearful. After all, the recent financial crisis was exacerbated by the record high prices in 2008.

Despite Saudi Arabia’s oil minister promising to expand oil output by as much as 25 percent this year, the oil market remained unconvinced with Brent Crude closing at $124.43 on Wednesday.

On Tuesday, Ali al-Naimi, Saudi Arabia’s oil minister had called the recent oil prices ‘unjustified’ and vowed to intervene to lower oil prices. He said:

[quote] My only mission is to convey to you that there is no supply shortage in the market. We are ready and willing to put more oil on the market. [/quote]

The current oil prices are just $23 below the record high levels in 2008, when prices peaked at $147.30 in July.

Robin West, chairman of PFC Energy, told the Washington Post:

[quote] What the Saudis are trying to do is to change the psychology of the market and demonstrate that the market is well supplied. [/quote]

According to Nouriel Roubini, the real reason for the increase in oil prices is fear. He wrote:

[quote] The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.” [/quote]

Last weekend, IMF chief Christine Lagarde said the global economy may already be on a recovery path, but cautioned that the rising price of oil is fast becoming a threat to global growth.

Referring also to recessionary risks stemming from volatile oil prices, Roubini also said:

[quote] Oil is already well above $100/barrel, despite weak economic growth in advanced countries and many emerging markets. The fear premium might push prices significantly higher, even if no military conflict ultimately takes place, and could trigger a global recession if one does. [/quote]

Read the full story: The Fear Premium Is Driving High Oil Prices: Nouriel Roubini

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