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What's Driving the High Price of Oil? November 28, 2007
On Wednesday, November 21, 2007, the price for a barrel of crude oil topped $99, a record sum -- more than quadruple the highest price just five years ago. Some industry analysts not only foresee $100-a-barrel oil in the near future but also speculate it could rise close to or above the $150-a-barrel range. It is worth noting that before the current run-up in prices, the average global price for a barrel of crude oil had reached as high as $93.43 in 1980 (adjusted for inflation). In the United States, oil’s rising costs have made their impression on the consumer. Gas prices have climbed: a gallon on the West Coast today costs an average of $3.30, up from $2.47 at the same time last year (gasoline’s previous high was $3.12 a gallon in 1981 -- adjusted for inflation). Almost every consumer product and service are affected by these increased costs: the food production, shipping, manufacturing, and transportation industries are just some of the nation’s vital economic sectors that have increased consumer prices to offset increased fuel charges. Because of greater demands by U.S, consumers as well as other nations’ developing and expanding economies, energy analysts believe those demands will continue to outstrip global supplies and refining capacity, thus assuring higher prices. Currently, the United States is the world’s largest consumer, using nearly 21 million barrels a day, or 23 percent of total world consumption. To meet those needs, the United States must import nearly 60 percent of its oil—more than 10 million barrels a day—with Canada being the largest supplier, followed, in decreasing order, by Saudi Arabia, Mexico, Venezuela, Nigeria, and Iraq. The world’s next-largest user, China, presently consumes seven million barrels a day. Given China’s enormous economic growth rate, experts believe its usage will increase sharply over the next several years. And as the global economy expands, other developing countries--particularly India and some African nations--are becoming increasingly oil dependent. Every day, the world consumes more than 80 million barrels of crude oil. World petroleum reserves are estimated to be 1.3 trillion barrels—sufficient to fuel the world at its current rate of usage for another 40 years. Most energy analysts, however, forecast that demand will increase annually at between 1.5 and 2.5 percent. At this rate, the world’s dependence on oil will have reached 120 million barrels a day by 2030. So, is increased consumption a problem? Peak production theorists believe so. They posit that, despite the existence of large reserves in the Middle East and Canada, worldwide refinery capacity is limited to, at most, only 100 million barrels of oil daily -- not enough to meet the projected demand. Industry experts warn if peak production is capped and worldwide consumption remains on the same trajectory, a global “energy crunch” is almost certain to occur by 2030. Analysts cite the possible future scarcity of oil that is largely responsible for its high price today. In addition to climbing prices, the relative weakness of the dollar compounds the problem for U.S. consumers. Currently, the futures market for oil—its speculated future value—is priced much higher than what it’s worth today. Such price speculation is likely to prove profitable in the short term but is not without its long-term risks.
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