Oil Prices Rose in 2011:
Crude oil prices reached a recent high of $113.93 on April 29, 2011. Prices had been increasing steadily since February 2009, when prices dropped to $39 a barrel. Prices hovered at a comfortable $70-$80 a barrel until late 2010. High oil prices translate to
high gas prices. Petroleum is also an ingredient in fertilizer. This, combined with higher transportation costs, increases
food prices. The forces driving high oil prices are similar to what happened when oil hit an all-time high in 2008.
Oil PricesAll-Time High Was $145 a Barrel:
Oil prices hit an all-time high of $145 a barrel in July 2008. This drove gas prices to $4.00 a gallon. Most news sources blamed this on surging demand from
China and India, combined with decreasing supply from Nigeria and Iraq oil fields. However, even then this wasn't logical, since the economy was already in a recession. (Source: BBC, Oil Price May Hit $200 a Barrel, May 7, 2008)
Supply and Demand Were Not Alone in Driving Up Oil Prices:
The price of oil is driven by much, much more than supply and demand. Thanks to the recession, global demand in 2008 was actually down and global supply was up! Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd.
According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel. (Source: EIA. See Google Spreadsheet)
Commodities Trading Drove Up Oil Prices:
Why? Although the EIA pinned part of the blame on volatility in Venezuela and Nigeria, it warned of an influx of investment money into
commodities markets. Investors were stampeding out of the falling real estate and stock markets. Instead, they diverted their funds to
oil futures. This sudden surge drove up oil prices, creating a speculative bubble. (Source: EIA
Short-Term Energy Outlook)
This bubble soon spread to other commodities. Investor funds swamped wheat, gold and other related futures markets. This speculation drove up food prices dramatically around the world. The result? Food riots in less-developed countries by people facing starvation. (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 are also driven by a decline in the dollar. Most oil contracts around the world are traded in dollars. As a result, oil-exporting countries usually peg their currency to the dollar. When the dollar declines, so do their oil revenues, but their costs go up. Therefore, OPEC must raise the price of oil to maintain its profit margins and keep costs of imported goods constant. (Source: USA Today,Oil Briefly Spurts Near $104 per Barrel, March 3, 2008)
However, OPEC doesn't want oil prices too high, or alternative fuel sources start to look good. OPEC has said its target price for oil is between $70-$80 a barrel. In 2008, Saudi Arabia announced it would increase supply. This was one reason prices started to drop. (See
High Oil Prices Caused by Wall Street, Not OPEC)
(Article updated August 15, 2011)
