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Oil spikes again -

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Oil spikes again

The World Today - Monday, 9 June , 2008 13:15:00

Reporter: Emma Alberici

BRENDAN TREMBATH: World oil prices remain uncomfortably high today.

In US trading Friday, West Texas crude reached $US139 a barrel for the first time.

The latest spike coincided with a warning by a senior Israeli government figure that Iran would
face an attack if it continued to pursue its nuclear weapons program.

Analysts say the price of oil now has much to do with investors far removed from oil production.

Emma Alberici reports.

EMMA ALBERICI: Oil prices have doubled in little more than a year. They're now around $US140 a
barrel with predictions that $200 a barrel will be realised soon.

Early last week they seemed to have settled around $US123 a barrel, until Friday when the price
jumped $5. The following day it soared $11, the biggest one day gain on record.

Some market observers ascribe the rises to fundamentals, that is, the economics of demand and
supply.

On the demand side, China is chewing through 10 per cent of the world's oil supply in its
insatiable appetite for energy to fuel its rapid industrialisation.

And on the supply side, physically getting the oil out of the ground and onto container ships
becomes difficult when the countries producing oil are facing political and or economic upheaval.

Saturday morning Australian time, the Deputy Prime Minister of Israel said Iran would be attacked
if it pursued its ambitions for nuclear weapons. Iran is the world's fourth biggest producer of
oil, so the reaction from oil traders was swift.

Chris Caton, chief economist with BT, doesn't agree with the logic that says fundamentals alone
drive the oil price. There's fluctuations in the value of the US dollar and the influence of
speculative investors who have seen an opportunity to dive in to the oil market.

CHRIS CATON: More people, more hedge funds, more other investment vehicles, tend to regard
commodities as an investment class now, something they wouldn't have done say 15 or 20 years ago.
So the possibility of more speculation is certainly higher now.

EMMA ALBERICI: So you mean they invest in oil in the same way they invest in the stockmarket?

CHRIS CATON: Actually they invest in oil futures. I mean they never actually take physical delivery
of the oil, they're investing in a futures contract related to the price of oil. Yes, they are
doing that as well as investing in the sharemarket.

EMMA ALBERICI: It seems an odd thing to be investing in, but I suppose over the years investors
have looked at sugar and other agricultural products, so it stands to reason, I guess, that they
might go into these sort of commodities as well.

CHRIS CATON: You invest in what you think you can make money in.

EMMA ALBERICI: Leo Drollas of the Centre for Global Energy Studies at Stanford University in the US
spoke earlier to the ABC's Radio National.

He said Kevin Rudd's suggestion that the rest of the world lobby OPEC to increase supply was a good
one but it would do little on its own to reduce the price.

LEO DROLLAS: Well pressure needs to be applied on Saudi Arabia to increase output as much as
possible, and the United States has done that and Saudi Arabia has increased production slightly
for this month and next.

But it's only recouping the position that any production Saudi Arabia decrease in April. But the
other way to tackle it is to try to reduce taxes for those countries that have high oil taxes.

EMMA ALBERICI: The Labor Government in Australia is unlikely to drop the fuel excise if for no
other reason than it was flagged last month as a Coalition policy.

The only other way the price might actually start to come down is if and when people start to
change their behaviour by abandoning their cars and using alternative energy sources.

But Bob O'Brien, Barron's Online stocks editor*(see editor's note) told CNN you can't
under-estimate the influence of the speculators.

BOB O'BRIEN: At this point, at $139 a barrel, the price of crude has no bearing, no relation
whatsoever with the fundamental cost of extracting crude from the ground and shipping it to a
refining facility. I mean that's probably, that cost is probably closer to about $50 a barrel.

BRENDAN TREMBATH: Bob O'Brien, Barron's Online stocks editor, ending Emma Alberici's report.

*Editor's note: This transcipt has been updated to identify the correct interviewee.