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Sun 11 Jan 2009 04:00 AM

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What’s a fair price for oil?

Venezuelan President Hugo Chavez made several announcements during last month that the ‘fair' price of oil would be between US$70 and $90 per barrel. Saudi Arabia's King Abdullah has ventured a price of around $75.

Venezuelan President Hugo Chavez made several announcements during last month that the 'fair' price of oil would be between US$70 and $90 per barrel. Saudi Arabia's King Abdullah has ventured a price of around $75.

With a barrel of crude trading at around $40 at the time that this magazine went to press, some readers might - with some justification - remark that resource-rich Venezuela would no doubt have kept quiet on this issue when oil was trading at its $147 high back in July.

The drop to $40, and the suspicion on the part of some forecasters that further falls are in the pipeline, comes despite two decisions by OPEC to take more than 4.2 million barrels daily out of the global market.

For countries whose economies are almost entirely reliant on the good fortune of having deposits hidden beneath their soil, 2008 has been a year of ecstasy followed by agony. If the last six months or so have shown anything, it's that no-one benefits from massive fluctuations in the price of the world's most precious resource.

For airlines the world over, the cost of jet fuel has been the single biggest inhibitor on company margins. And the issue of hedging - which earlier in the year was heralded as the only way to bring stability to revenue - has turned out to be a case of damned if you did and damned if you didn't. Recent discussions with airfreight industry professionals have revealed what most assumed was the truth; that the peak oil price months left almost every firm running at a loss and relying desperately on a much-hoped-for fall in cost.

Of course, an agreement between OPEC and the West as to what actually constitutes a fair oil price would be, to say the least, tricky to achieve. It would also go against the free-market economics to which the traditional Western nations are so beholden.

Nevertheless, stakeholders in the oil industry, both national and corporate, need to try and grasp the nettle. For too long, the oil price has been driven by market sentiment, rather than key underlying fundamentals. Unpredictability suits no-one in the long run, except perhaps the banks of commodities traders in the world's financial centres.

One such UK-based trader, who was contacted in June by this journalist, admitted to private yet complete bafflement over the soaring prices. And as we move forward into 2009, the global economy is still an unknown quantity. Is it really in anyone's interest to carry on risking the future of some of the world's key industries in this way?

If you have any views on this or any other issue, we would love to hear from you. Please send your comments to edward.attwood@itp.com.

Ed Attwood is the deputy editor of Air Cargo Middle East & India.

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