The Oil And Natural Gas - 1842 Words

Introduction The IEA found that 59% of all primary energy consumption is from oil and natural gas. In the US and Europe reserves of crude oil peaked in the 1970’s and since then with only few notable exceptions extraction has outstripped additions to reserves. Oil is an exhaustible and finite resource, therefore it’s price must not only reflect current supply but future supply in order to reflect scarcity. It must be assumed that as reserves are an indicator of scarcity they should be important an factor in pricing. Though as a result of economic replenishment as price increases producers will find it possible to use more capital intensive methods to recover greater reserves such as drilling in the North Sea, and technological progress†¦show more content†¦This second category is factors that affect the the supply of oil, this is further split into two categories, factors that impact the level of supply, this can take the form of geopolitical risks, production capacity and the size of oil reserves. These are often partly mitigated by increasing technological progress and efficiency. The second category is factors such as economic exploration, market tightness and market structure which alter the responsiveness of supply to changing prices. Finally the role of financial markets in affecting the oil price is a key influencer, this is seen through hedging activity, speculation and the USD exchange rate. There is no universal consensus about which of these categories is the primary driver in oil prices or unified theory regarding the debate to whether fundamentals or expectations play more of a role. Work by Hamilton and Fattouh argue that the main price drivers are fundamentals while Cifarelli and Paladino conclude that a significant role is played by speculation, Kaufmann take the middle ground arguing that both contribute to changes in the price of oil. Scarcity Since 1960 the volume of new oil discoveries has been falling, with the exception of 2000-2009 when there was a small reversal caused by technological progress which enable the exploration of