Wednesday, January 02, 2008

Oil hits $100 per barrel

I actually think this new level of oil pricing is probably a good thing. It will make renewable energy more cost effective and hopefully spur us to mend our carbon producing ways.

However, if it leads to more coal power plants, then runaway global warming seems a certainty.

The Wall Street Journal explains that oil futures have become far more volatile due to changes in how oil is traded, which makes it hard to use past prices as a benchmark against current volatility.

While finding oil in the ground has been getting harder, it became a lot easier to buy oil on paper. The New York Mercantile Exchange started round-the-clock electronic trading of its main crude benchmark in September 2006 and improved access to previously restricted energy trading markets. Financial institutions created new vehicles for making bets on the price of oil without having to manage futures holdings.

All of this has helped attract a flood of new money that has transformed oil trading. The oil markets were once dominated by physical traders—firms that needed to take delivery of the crude oil to run through refineries or trade with partners. Most of the new market entrants have no interest in ever taking delivery of a barrel of oil.

The new money came from hedge funds seeking profits in sharp oil-price moves, pension funds seeking diversification and a hedge against inflation, and Wall Street commodity desks helping financial investors make sophisticated bets and risking their own capital.

The number of oil-futures bets outstanding on Nymex has quintupled since 2001. Because oil has been rising at the same time, the dollars at stake in the main oil-futures benchmark, not including options, rose from roughly $7 billion in 2001 to more than $145 billion, calculates Ben Dell, energy analyst at Sanford C. Bernstein & Co.

As this surge of money chased a slowly growing number of barrels, prices sprinted upwards. And there is little to indicate that the conditions created by these financial commodity traders will push prices down anytime soon. |The Road to $100 Oil – and Beyond -- WSJ|

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