The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking

(Tina Meador) #1

PRICE OF CRUDE OIL


The oil market followed the same pattern that we saw in the coal market.
Crude oil and the refined products markets have also developed and matured
over the years. That is why, as we found in the case of coal, we can safely
look at oil price gyrations in the market to try to learn the relationship be-
tween the price of oil and that of other commodities. The chart in Exhibit
5.11 is intriguing. It shows that despite the large rise in oil prices in terms of
U.S. dollars, in normal times the price of oil in terms of gold is stable, ranging
from 0.06 to 0.12 ounces of gold per barrel of oil (10–20 barrels of oil for
every ounce of gold), with an average price of 0.085 ounces of gold per barrel
of oil (12–13 barrels of oil per ounce of gold). In fact, based on my 14-year
experience in the oil industry—ten of these years were with a major United
States–based oil company—we considered 10–13 barrels of oil per ounce of
gold a fair value. This ‘‘technical analysis’’ was shared by some of the distin-
guished ‘‘technical analysts’’ at Smith Barney/Citigroup in 1999, and they
started using it as an important indicator for oil price trends.
We can see from Exhibit 5.11 that if the value of oil in terms of gold in-
creases and penetrates the upper boundary of 0.12 ounces of gold per barrel


EXHIBIT 5.8 Price of homes in wheat.


114 THE ART OF ISLAMIC BANKING AND FINANCE

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