Tuesday, December 21, 2010

Cold Weather and Rising Energy Prices

Oil prices are approaching $90 a barrel, reaching a high of $89.97 in today's trading on the NYMEX exchange and closing at a 2-year high. It's also cold in much of the eastern U.S. and western Europe where a lot of heating oil is consumed, so the weather must be causing the price rise, right?

Well, not really. CNBC's Squawk Box this morning had an extended interview with John Kingston, Platts Global Director Of News. He stated that of the major factors affecting oil prices, weather was perhaps third. The primary cause of the price rise is an imbalance between a probably unprecedented increase in demand and OPEC's inability to expand production at a sufficient rate. In particular, China's consumption has increased by 13% since November 2009, driven at least in part by conversion of electricity generation from coal to diesel.

Kingston's outlook for 2011: $100 per barrel is well within reach based on demand forecasts. Veteran oil analyst Charles Maxwell, interviewed on Bloomberg, sees $150 in the next several years.

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