September 01, 2012

Book Review : Understanding Oil Prices by Salvatore Carollo

(This story was published in Businessworld Magazine Issue Dated 21-05-2012)

Bedlam is the right noun to denote the oil market. Especially to qualify the fluctuations in oil prices. Everyone is affected, but few have a clue about the why of it all. It takes a great deal of toil and pots of good luck to crack the code. You should know more than what is what and who is who. Understanding Oil Prices by Salvatore Carollo is a helpful guide for students of the oil market. Carollo walks the reader through different avenues of the oil industry and explains how factors such as technology, environment, financial markets and governance (or the lack of it) affect oil prices. He also elaborates on how a simple universal model is just not applicable in predicting oil price movements.

The book starts by explaining the crude oil ‘paradoxes' and moves to recent market vents (2008-11). It also chronicles events since the 1970s oil crisis that have shaped this industry. Carollo covers all the key events in the history of oil trade such as the closing of the Suez Canal in late 1960s, which brought in the supertanker era, or the Chernobyl disaster which led to stricter environmental laws or the 1980s when a ‘paper market' (futures contracts) was started. It also analyses key issues and events such as the world energy policy, the financial crisis, the evolution of oil price since the 1960s, the rise and influence of Opec, etc. The author digs deep into the futures universe — the financial Mordor (courtesy Tolkien), where paper-wielding analysts determine the future of the barrel. Such a world holds no links to the actual oil industry, but it rules the industry and triggers fluctuations in the price of ‘real' oil. The author reiterates that the economic principles on supply and demand are no longer useful in forecasting or predicting  oil prices. Carollo will help you understand why even when the Opec keeps increasing production, markets respond with an increase in the crude oil price. Thankfully, and interestingly, the book does not go very deep into the technical analysis of price movements. Further, the book is full of interesting nuggets of information. Do you know, for instance, that the US consumes 30 times more gasoline than Italy, but its tax revenues from automotive fuel is about a third of Italy's?

The author concludes by emphasising the importance of nuclear power and its relevance in the future and the need for an active political and organisational leadership at a global level in guiding and governing this extremely important commodity. The book is backed by extensive research, which reflects the author's experience. Carollo is an engineering graduate from the University of Palermo, Italy, where he worked at Italian energy giant Eni, before trying his hand and refining, market research, supply and trade of oil. That said, he is not didactic in his views, and his observations make the book an extremely enjoyable read. Informative charts and tables add to the pleasure.

(This story was published in Businessworld Issue Dated 21-05-2012. This review and other book reviews for BusinessWorld Magazine by me can be accessed here.)



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