Why are Oil Prices So High?

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.