Andrew Leonard at How the World Works – Salon.com
Soros listed four factors as playing a role
* “First, the increasing cost of discovering and developing new reserves, and the accelerating depletion of existing oilfields as they age. This goes under the rather misleading name of peak oil.”
* “Second, there is what may be described as a backwards-sloping supply curve. As the price of oil rises, oil-producing countries have less incentive to convert their oil reserves underground, which are expected to appreciate in value, into dollar reserves above ground, which are losing their value.”
* “Third, the countries with the fastest-growing demand, notably the major oil producers, China and the other Asian exporters, keep domestic energy prices artificially low by providing subsidies, therefore rising prices don’t reduce demand as they would under normal conditions.”
* “Fourth, both trend-following speculation and institutional commodity-index-buying reinforce the output pressure on prices. Commodities have become an asset class for institutional investors and they are increasing allocations to that asset class by following an index-buying strategy. Recently, spot prices have risen far above the marginal cost of production and far out forward contracts have risen much faster than stock spot prices.”
Andrew makes a good point about how it is tough to assign weights to these factors.
Interestingly, the subsidy of the Asian and middle eastern countries will stop providing the right signal to the market to develop renewable energy and in the long run this will hurt these countries more. However, if they risk increasing the price, there is the chance of stagflation.
