The price of oil began rising in October 2008 and reached record levels in 2009 and again in 2010. As a result of these price increases, consumers’ budgets have been under pressure, business costs have risen, and oil producers’ profits have increased. Congress is considering broad energy legislation , that addresses conditions in the oil and petroleum products markets.
A long term explanatory factor for increasing oil prices could be the decline of the world reserve base. The reserves to production ratio is the measure which indicates the world’s ability to maintain current production, based on proved reserves. Over the past decade there has been little change in the reserve to production ratio, suggesting that, at least for now, long term forces are not driving up the price of oil.
A wide variety of cyclic and short term factors have converged in such a way that the growth of demand has been unexpectedly high causing upward pressure on oil prices. Those factors which have been identified as contributing to the high price of oil include the resumption of relatively rapid growth rates of gross domestic product in many
countries around the world, a declining value of the U.S. dollar, gasoline prices, the changing structure of the oil industry, OPEC policies, and the persistently low levels of U.S. crude oil and gasoline inventories.
Expectations concerning future market conditions are quickly embodied in oil prices formed in futures markets like the New York Mercantile Exchange. The fear of terrorism and war, uncertainty concerning the relationship between the Russian government and the oil company Yukos, and other political factors are quickly reflected in price along with real political unrest like that experienced by oil producing Venezuela and Nigeria. Speculative buying and selling might also affect prices as financial traders adjust their investment portfolios to reflect expected market conditions.
Demand patterns for world oil and oil products show significant diversity by country, region, and product groupings. As a result of this diversity it is not possible to attach blame for the current level of price to any one nation, region, or product segment. The view that the oil market is international in scope and tightly interrelated is enhanced by the demand data. As a result of the integrated nature of the world oil market it is unlikely that any one nation acting on its own can implement policies that isolate its market from
broader price behavior. As new major oil importers, notably China, and potentially India, expand their demand, the oil market likely will have to expand production capacity. This promises to increase the world’s dependence on the Persian Gulf members of the Organization of Petroleum Exporting Countries, especially Saudi Arabia, and maintain upward pressure on price.
Spot market price data for West Texas Intermediate (WTI) at Cushing, Oklahoma, is shown in Figure 1.1 During the time period covered in Figure 1, the OPEC price band for crude oil was at $22 to $28 per barrel. Accounting for quality and location differences between the OPEC reference crude (Saudi Arabian Light) and WTI, prices in the U.S. spot market during 2003 remained.
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