This is lower than 2012's average of $112 per barrel. The EIA bravely forecasts the average price of oil will fall even more in 2014 to $99 per barrel. Why? U.S. pipeline capacity will be expanded, allowing greater supply. Demand will be only mildly supported by moderate economic growth in the U.S. The EIA forecasts growth to be at the low end of the healthy 2-3% growth rate. (Source: EIA, Short-Term Forecast)
Reasons for High Oil Prices in 2012:
By March, Brent Crude Oil (which is more expensive than WTI) peaked at $125 a barrel. It settled down to $95 a barrel in June, but rose $113.36 by August. Normally, oil prices drop in the fall and winter. However, commodities futures traders were bidding up oil prices to offset what the Fed's expansive monetary policy. They were betting the dollar would drop, which drives up oil prices. They were wrong about the dollar, but oil prices rose despite lower demand. (Source: Forbes, The Price of Oil Is the New Economic Spoiler, September 12, 2012)
People were concerned because gas and oil prices rose earlier than in the past. However, less and less of oil prices are due to supply and demand. More and more of it is based on the expectations of commodities markets.
Why Oil Prices Rose in 2011:
The All-Time High Was $143.68 a Barrel:
Supply and Demand Are Not Alone in Driving Up Oil Prices:
The price of oil is driven by much, much more than supply and demand. This was proven in 2008. Thanks to the recession, global demand in 2008 was actually down and global supply was up. Prices rose, nevertheless. 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:
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)
This explains why oil prices are lower today than they were in 2008, despite a healthier global economy and greater worldwide demand for oil. Today, there are many more outlets for investment funds. In 2008, the global markets were so risky and uncertain, investors turned from stocks, bonds and even housing to the U.S. dollar, gold and oil. In 2012, despite uncertainty around the eurozone crisis, investors had many more options. The stock market rose, the bond market was less risky, and even housing improved. Although the global market is still in slow growth mode in 2013, it is stabilizing, and that means oil prices shouldn't break the peak hit in 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)
