WASHINGTON—On March 26, the spot price for a barrel of crude oil settled on $105.83. Gasoline prices around the same time had reached an average price of $3.52 a gallon on the U.S. West Coast and $3.24 on the East Coast, according to daily statistics from the U.S. Energy Information Administration (EIA).
The average price for diesel fuel was $4.00 in the United States in late March, more than tripling the price from the same period last year. The significant increase in the price of diesel stems from spikes in global demand.
In the United States, there are regional price differences for oil and gasoline. The price on the West Coast could be anywhere from 10 cents to $1 higher per gallon than that on the East Coast.
Regional differences in gasoline are caused by the competitive environment, such as the number of gasoline or oil dealers in an area. Distance from the Gulf Coast area, where most of the gasoline is produced, also affects shipping price. Unexpected refinery maintenance can cause bidding for available supplies, which then starts a price war, according to the EIA.
Until the year 2030, the average price for a barrel of oil may fluctuate, but should not extend much beyond $113 per barrel, according to EIA administrator Guy Caruso in his testimony before the U.S. Senate Committee on Energy and Natural Resources.
Caruso said that the oil price is driven by "global economic growth, shortages of experienced personnel, equipment and construction materials in the oil industry, and political instability in some major producing regions."
Jitters are running through the oil industry, and fears of oil shortages are springing up. Disruptions of any kind could affect global oil prices significantly. Crude oil production decreased from the daily 1.5 million barrels to 550 thousand barrels after a terrorist attack on Iraqi oil pipelines on March 27, according to the Earth Times, a Web-based news reporting agency. Although volumes are now back to normal, the scare remains.
Oil-Rich Nations Rise in Economic Power
Oil producing countries—the largest being Saudi Arabia—rake in billions of dollars annually from their oil exports and will continue to do so over the foreseeable future.
In 2006, Russia produced 9.3 million barrels of crude oil per day, followed by Saudi Arabia with 9.2 million and the United States with 5.1 million barrels, according to a Hoover Institution press release.
Income potentials for oil producing countries are phenomenal. "At $70 a barrel, petrodollars [flowing] into global markets would grow even larger (compared to $50 a barrel), reaching $628 billion annually by 2012, implying new petrodollar investments of nearly $2 billion a day. By 2012 the total stock of petrodollar foreign assets would grow to $6.9 billion," according to a recent McKinsey Quarterly article titled "The New Role of Oil Wealth in the World Economy," by Diana Farrell and Susan Lund.
The oil wealth is breeding investors who challenge established financial markets and change the market power dynamics: "The majority of these revenues have been recycled into global financial markets, making petrodollar investors increasingly powerful players," according to Farrell and Lund.
McKinsey experts claim that petrodollars are invested more or less wisely and held by six groups—central banks, sovereign wealth funds (SWF), government investment firms, government and privately owned companies, and wealthy individuals.
Unease From Western Financial Giants
"With such huge sums, investors from oil-exporting countries and China would undoubtedly shift economic power from the West, a dynamic that is raising concerns among Western political and business leaders," claims Zawya, one of the major Middle Eastern business-research and information companies, in a recent article.
McKinsey and other Western experts do not project such a trend. Power centers shift periodically, and the market has always found ways to deal with them.
The McKinsey research suggests that petrodollar investors are cautious market players who are very discreet in their dealings. "Investment portfolios are widely diversified not only across asset classes and regions, but also through a number of intermediaries and investors."
Western market players show some concern about political interference by governments that have amassed large amounts of petrodollars in SFWs. As a result, European and U.S. politicians and those involved in such matters are promoting disclosure standards for government investors, according to Farrell and Land.
SWF Assets Balloon
In simple terms, an SWF is an investment vehicle that manages government funds not within a nation's reserves.
SWFs have been around since the 1950s and aren't a new phenomenon. In the past, the total assets among such funds were around $500 billion. But today, these funds have increased and total between $2 trillion to $3 trillion and could reach $10 trillion in assets by 2012, according to an International Monetary Fund (IMF) report.
The United Arab Emirates SWF Abu Dhabi Investment Authority has $875 billion in its coffers, by far the largest of such funds. Saudi Arabia, Norway, and China have also managed large SWFs, each holding around $300 billion, according to a December 2007 Morgan Stanley Investment Management Journal article titled "Sovereign Wealth Funds: A New and Growing Class of Funds." Globally, around $1.7 trillion of such funds were from petrodollars.
The IMF suggests that SWF assets are still small compared to globally traded securities of $165 trillion.
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