Oil Prices Skyrocketed to $145 a Barrel in 2008:
By July 2008, Crude oil prices have increased to $145 a barrel, causing gas prices to rise to $4.00 a gallon. According to most news sources, this was a result of surging demand from China and India, and a curtailment of oil supply from Nigeria and Iraq. (Source: BBC, Oil Price May Hit $200 a Barrel, May 7, 2008)Supply and Demand Were Not Alone in Driving Up Oil Prices:
Although these trends were accurate,the price of oil was being affected by more than supply and demand. In fact, the data shows global demand was down and global supply was up. Oil consumption decreased from 86.66 million barrels per day (bpd) in Q4 2007 to 85.73 million bpd in Q1 2008. During this same time period, supply increased from 85.49 to 86.17 million bpd. According to the laws of supply and demand, prices should have decreased.
Instead, during this same time period, they increased almost 25%, from $87.79 to $110.21 per barrel of oil. (Source: EIA. See Google Spreadsheet)
Commodities Trading Drove Up Oil Prices:
Why? The EIA pinned part of the blame on volatility in Venezuela and Nigeria. It also cited an increased flow of investment money into commodities markets. In other words, money that had been invested in real estate or the global stock markets was diverted to oil futures. (Source: EIA Short-Term Energy Outlook)Furthermore, these funds were also being invested in wheat, gold and other commodities, causing high prices in food, which resulted in food riots in less-developed countries. (Source: BBC News, Commodity Boom Continues to Roll, January 16, 2008; CNN, Riots, Instability Spread as Food Prices Skyrocket, February 18, 2008)
High oil prices in 2008 were also partially caused by a decline in the dollar. Oil is priced in dollars, so OPEC needed to raise the price of oil to maintain its profit margins. Furthermore, as investments such as real estate and stocks declined, traders were getting into commodities such as gold and oil futures. This caused a bidding war, and resultant bubble. (Source: USA Today, Oil Briefly Spurts Near $104 per Barrel, March 3, 2008)
