Why Oil is Close to $100 Per Barrel

Shock and fear is hitting consumers as winter approaches and oil prices have increased by $25 a barrel over the last ten weeks. What is going on? Why is it happening and can anything be done about it?

The fear of shortages is one reason for the rapid price increases. The Energy Information Administration revealed that oil stocks in the US are much lower than expected, raising fear that there will be a lack of supply over the winter months and have asked OPEC to increase supply.

Political tensions are another factor. America is the world’s largest oil consumer. Political tensions are high with Iran which is the fourth largest producer of oil in the world. The US has accused Iran of backing the Shia militants in Iraq and is threatening to impose sanctions on Iran. This could effect US supply of oil from Iran. There is also threat of supply disruptions from Iraq due to fears of conflicts between Turkey and Kurdish rebels in Northern Iraq. There is also instability, as always, throughout the Middle East which continually offer supply threats.

The weak dollar is having a major effect. The weak housing market and turmoil in the financial markets caused by the subprime mortgage problem and its effect on the economy in the US has pushed the dollar to record lows against the euro and the pound. The dollar is par with the Canadian dollar for the first time in 30 years. Investors are buying more oil in an attempt to hedge their losses from the weak dollar. These weaknesses are expected to be exacerbated by another expected interest rate cut by the Federal Reserve which will put more downward pressure on the dollar. This will drive oil prices even higher and threaten to drive up inflation. Investors are flocking to commodities like oil or precious metals to protect themselves from these threats.

Oil demand is strong which also has a major effect on oil prices. The rapidly growing economies of China and India are increasing their consumption of oil by 10 to 15% per year. China is second behind the US in oil consumption and its demand is growing at close to 15% per year. Demand is expected to increase throughout the world by 2% a year over the next five years.

Can production be increased to help reduce costs? OPEC, which is the world’s largest oil supplier recently raised its production quotas by 500,000 barrels a day. OPEC has stated that they feel the recent price increases are due to geopolitical issues and that there are adequate supplies of oil. This makes it unlikely that they will further increase their production quotas to help ease the price increases. US companies like Triple Diamond Energy Corporation help alleviate our dependence on foreign oil by finding new sources of domestic oil supply.

All of these factors are exacerbated in the US by the predictions of a major slowdown in the US economy next year which could force us into a recession. It seems that the price of oil is always a factor in times of economic instability. Supply shortages, political tensions, the weak dollar and increased demand seem to be here to stay and enhance the importance of reducing our consumption of oil.