Everyday we hear speculations of higher oil prices and then the news will emerge a few days after that indeed, record highs have once again been hit. As the inflation rate throughout the world continues to rise and oil and food gets even more expensive, we should stop and ponder why is this scenario unfolding and what or even who is behind it. We should explore what should have been done and what could be done. We, as direct users of oil and gasoline, should at least know why we are paying for oil prices that are of such burdensome amounts. A combination of factors should be identified as the reasons for the historical rise in oil prices.

Oil Price Projection

It is quite daunting to look back at 2003 and realize that in today’s monetary value (considering 2007 inflation rate), oil price was only $31 per barrel. It rose to about $42 in 2004, $54 in 2005, $61 in 2006 and $65 in 2007. What one might not be able to perceive and understand is that in the past 19 months or so, oil price has taken a great leap to almost $146 per barrel.

We should take a look at what are the possible reasons behind the phantom jump in oil prices.

High demand of oil by world powers and rapid developing countries

The United States and China are estimated to account for half of the world’s oil consumption in 2007 and 2008. When demand for oil rises to exceed the amount of oil supplied, oil prices eventually rise to bring consumption to meet the level of supply.

A simple fact to drawn from this is that demand for oil is rising rapidly and oil prices rise in order to bring consumption in line with oil supply.

Seemingly not slowing down is the oil consumption level. Global oil consumption is expected to rise by 1.1 million barrels per day in 2007 and 1.5 million barrels per day in 2008. While high oil prices are impeding economic growth in industrialized countries such as the U.S., developing countries such as China, India and Brazil are showing no signs of slowing down due to the high oil prices.

Oil demand will continue its rapid rise while supply are not able to adequately meet the demand level due to political tensions in the Middle East and a growing demand for oil worldwide.

Organisation of Petroleum Exporting Countries

The Organisation of Petroleum Exporting Countries (OPEC) accounts for about half of global crude oil exports and is able to control oil prices by decreasing or increasing supplies to the global market.

A simple understanding of this concept is illustrated when the price of oil becomes too low due to excessive supply compared to demand, OPEC will cut outputs and create a scenario where demand is higher than supply to push prices back up. Similarly, when the price is too high, OPEC will increase oil production to raise supply level above demand level and eventually causes oil prices to fall.

In the past, OPEC ministers tend to wait for prices to drop before they lower supply to raise oil prices. However, aggressive tactics by the organization to cut productions in an attempt to pre-empt any weakening in prices of oil has led to record highs in oil prices, as can be seen today.

This artificial lack of supply created by OPEC did not allow oil prices to fall. Normally, international oil companies use times of low demand to stock up on supplies. However, with the OPEC raising oil prices, these companies have less oil reserves and the further risk costs on top of high oil prices are passed on to everyday users like us, who are feeling the pinch and experiencing the need for tighter budgets to pay for oil.

Political reasons and Middle East tensions

The Iraq war, tensions in Nigeria, Venezuela and Iran have threatened oil production and such political instability could see oil prices climbing to newer heights.

After decades of war and the ongoing U.S. invasion in Iraq, the impoverished nation is struggling to revitalize its oil industry. The pipelines in the Northern State of Kirkuk has experienced technical problems and continued sabotage and a constant threat of Turkish invasion against Kurkish rebels has resulted in additional woes for supplies that might incur higher prices of oil as supplies dip. There is, however, hope that oil production will be back to pre-war rate as a new president of the United States is elected. Democratic nominee Barack Obama is strongly favoured to win the next presidency that might see an end to U.S. invasion of Iraq.

Nigeria, the world’s 8th largest oil exporter, has endured waves of militant attacks on its oil industry since February 2006 and has seen a reduction in oil production due to continued sabotage. Oil companies have reported reduction of 547,000 barrels per day of Nigerian oil production due to such attacks aimed at its oil industry.

Venezuela has experienced a drop in oil production since December 2002 since political strife and instability brought its oil production to a halt. It has never fully recovered since and as Venezuela decides to nationalize its oil industry, oil production is expected to further decrease as oil revenues are invested to meet other national goals rather than being re-invested into the oil industry.

Oil production is highly expected to dip in the near future as Iran continues to be grilled in disputes with the West, mainly the United States, over its nuclear program. Iran is perceived by the West and Israel as trying to develop nuclear weapons under cover of its stated aim to develop a civilian nuclear energy programme. As the world’s fourth largest oil exporter, a drop in oil production level by the country intensifies fear that oil prices will further rise. The dispute with the West is expected to escalate further as Iran tested new missiles, the Shahab-3, to display its military prowess as the G8 summit is held in Tokayo, Japan. The new missiles are stated to put neighbouring countries, especially Israel, within striking distance and the U.S. has warned Iran that U.S. will defend Israel if Iran decides to attack. This ongoing dispute will only deteriorate as U.S. continues to slap sanctions on Iran in the face of Iran’s aggression and oil prices are expected to rise again to new heights.