How Did Oil Get to $108 per Barrel?
Let’s start by looking at the charts of this parabolic rise of this critical commodity:
Daily View:
Weekly View:
Monthly View:
Can you remember how, less than 10 years ago, the price of one barrel of oil cost less than $15? Gas prices in the US cost less than $1.00 per gallon about that time. Filling up most cars cost less than $20. Now, you’re lucky to fill-up most cars for less than $50 at the pump.
But is this a fundamentally driven rise, or a speculator driven one? In other words, is there a real reason for this climb, or is it just because traders are betting that it goes higher, and taking positions expecting to profit in the short-term?
According to a February 2008 Explorer article from the American Association of Petroleum Geologists, oil prices are likely to go higher.
Paul Roberts, author of the prescient book The End of Oil, “Clearly, there’s more than just the fundamentals at play – the Saudis and OPEC have been pointing the finger at speculators, and there’s some truth to that.”
But speculators aren’t solely to blame. Why?
“If it were strictly speculator-driven, some speculators would start making money by taking a short position,” essentially betting that oil prices would have to fall
Production declines have been quicker and steeper than expected, while new production from newly developed areas (like Kazakhstan) have disappointed, Roberts added.
However, “on the demand side of the equation, there’s no uncertainty. It’s just rising steadily.”
“The resulting imbalance, with producers straining to meet increased global demand, has led to soaring oil prices and [angry] consumers.”
Other factors beyond supply-demand (and speculation) do influence crude prices.
“The most obvious is the sagging dollar,” Roberts wrote. “Because oil is priced in dollars, and because the dollar has fallen nearly a third against major developed-country currencies since 2002, Americans are spending more for a barrel of oil.”
However, there’s no guarantee of higher prices, argues writer Ed Crooks. “”Recession in the world’s biggest oil consumer (the United States, which consumes almost one quarter of the world’s oil) plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil price,” he observed.
While futures traders can take advantage of this almost stratospheric trend, consumers do not benefit from higher oil prices, which serve as a tax on drivers and companies. Higher oil/gasoline prices certainly do not help ease the pressures of a possible US recession.
In the meantime, should oil prices stay at, or increase beyond this level, there may be further economical repercussions that affect your personal pocket book that cause you to cut back on other expenses, which again would be a bad omen for the broad economy.