What has driven up oil prices

Speculation and a falling dollar may now be as important as supply and demand, analysts say.

from the May 2, 2008 edition

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Global economic expansion has resulted in a world demand for oil that has been rising steadily – and has proved remarkably resilient in the face of high prices.

According to Cambridge Energy Research Associates, world oil demand will increase a further 1.3 million barrels per day in 2008, with Asia and the Middle East accounting for 800,000 barrels per day of that growth.

To put that figure in context, the US consumes about 20.6 million barrels per day, or roughly 25 percent of global demand. China is the second-largest consumer, at 7.2 million barrels per day. Japan, with 5.2 million barrels per day, is third.

High gas prices have dampened demand somewhat, but not as much as might be expected, according to Jeroen van der Veer, chief executive officer of Royal Dutch Shell.

The demand reaction to continued high prices might be a delayed one, said Mr. van der Veer at a recent symposium at the Council on Foreign Relations.

"We think it may happen that people won't drive less, but that next time they buy a car they will buy a more fuel-efficient car," he said.

Then there are the reasons for high prices that fall under the "speculative" category referred to by Ms. Myers Jaffe.

Prime among these is the fall in the value of the dollar relative to other currencies. Oil is denominated in dollars, so that if the dollar becomes cheaper relative to, say, the euro, producers need higher prices if their global purchasing power is to remain the same.

This phenomenon may have accounted for as much as one-third of the rise in price of a barrel of oil since December 2000, according to Baker Institute calculations.

With world stock markets volatile, and the US credit crisis leading to unpredictable effects around the world, investment money is also flowing into oil and other commodities, which are seen as more stable, safe bets. This puts further upward pressure on a barrel's price.

The total effect of these financial pressures is a matter of some dispute among experts. Many OPEC nations, for instance, blame financial speculation for much of the recent increase. Others hold that the market believes supplies will remain tight for some time to come – meaning fundamentals remain the most important oil price pressure.

Will prices stay high? That depends in part on the prospect of geopolitical events, such as unrest in Nigeria, that can cause spikes.

Mr. Pumphrey says, "we are looking at prices above $100 [a barrel of oil] for the rest of the year."

Myers Jaffe says the price reflects a "bubble" and that the market is due for a correction.

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