Why are oil prices high?

It seems that there are 6 real indicators as to why the price of oil, as measured in the price per barrel, is so high.  Those indicators are: The weakness of the US Dollar, Fund Investments, Demand, OPEC, Refining Limitations, and Geo-Political turmoil.According to Pilot Travel Centers, LLC (www.pilottravelcenters.com) “Commodities that trade in USD are viewed by investors – both domestic and international – as cheap.”  The rise in oil is in line with increases in most other commodities like wheat, cattle feed, lead, coffee, etc.  “The trading liquidity provided by crude oil has encouraged oil buying as a hedge against the anemic USD.  Since oil world wide primarily trades in USD, the weakness has impacted the purchasing power of OPEC and has receded in line with the USD.”  They say that a good indicator of the trend in commodities is to track the performance of the US Dollar to that of the Euro; oil moves in the opposite direction.

Secondly, “investment funds – both hedge and pension – have been flooding into commodity markets as they attempt to secure the greatest returns for their investors.  The recent injection of billions of dollars by central banks around the world to provide liquidity in the face of massive write-downs in the credit arena has brought money into energy and commodities.”  Commodities are a very attractive hedge against unstable asset-based funds and oil prices change accordingly.

With low inflation and a strong US economy, demand remains high locally.  Investment into more energy efficient means of transportation and higher performing vehicles in regards to fuel economy typically take between 8-10 years to influence prices.  Throw in the mix the huge growth that India and China have shown in terms of demand and prices are being affected as to be expected.  The supply of oil is affected world-wide and small changes in local demand, no matter where the locale might be, have limited impact on prices due to the nature of oil as a commodity. 

As is to be expected, OPEC continues to dominate the supply of oil to market.  “With world inventories at record high levels in late 2006 (aided by a price structure that encouraged buying and holding), OPEC commenced to reduce oil output to stem the steep fall in prices” in the second half of 2006.  Now that prices are rising and the typical winter demand for oil increases, OPEC has expanded production of an extra one-half million barrels per month.  However, there apparently are no supply shortages as no country or enterprise is being turned away from purchasing oil.  As a result, the expansion in production will not have an effect on the price per barrel of oil.

Refining capacity in the US and abroad have been limited this year as well.  “Extended maintenance programs and unplanned downtime have kept refining capacity below historical levels.  Fall maintenance programs are now ending, so some return to higher capacity is expected.  With short-term fuel demand questionable and growing worldwide capacity, refining should be able to handle supply as we go forward.”

However, one of the most problematic issues behind high oil prices remain geo-political issues.  Middle-East issues continue to add cost to the price per barrel with some estimates around $15-$25 per barrel caused by uncertainties alone.  Iran is the world’s fourth largest exporter of oil, Nigeria is the world’s eighth largest supplier, Iraq used to provide over 3million barrels per day, Turkey’s problematic northern pipeline produces now only 2million barrels per day, and Syria, Pakistan, Israel, and Lebanon are additional suppliers; all of which are under obvious tensions.  In addition, Russia and Venezuela continue their nationalization of oil companies and other shenanigans further adding to the risk in the price per oil.  Thus, oil is a great hedge against these uncertain worldly conditions and is being exploited accordingly. 

That being said, Americans are resilient to these types of price effects regardless of what weaselly politicians may say.  Thanksgiving travel was at an all time high and all reports seem to indicate that Christmas will be the same.  In addition, coal production is going great guns so that the costs to heat our homes this winter will be reasonable and manageable as well.  Just keep those darn loony environmentalists away from the coal industry and power industry and life will go on just fine.  Remember, the internal combustion engine is one of the greatest inventions ever made and there is a reason that it powers almost all of our transportation today.  Efficiency is the name of the game and nothing is more efficient than American and her people.


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