What is driving oil prices so high

Oil prices have surged to record highs above $90 a barrel today. Prices have more than quadrupled since 2002 and are currently 40% higher than at the start of the year. What factors are causing this unremitting increase and what are the likely consequences for consumers and the global economy?

a. The situation in northern Iraq is just one of a number of geopolitical factors which are causing uncertainty in the market and helping to push prices up.

b. Militant violence in Nigeria’s largest oil-producing region and recent violence in Afghanistan and the Yemen has also served to inflate prices.

c. The weak US Dollar, which makes it cheaper for importers to buy dollar-denominated oil supplies, is also a major factor.

d. The biggest catalyst for oil’s seemingly remorseless rise has been the simplest economic driver there is: the balance between demand and supply. Demand is at an all-time high, fuelled by the continued breakneck economic expansion of the Indian and Chinese economies. With more than a billion people in each country, and both economies growing fast, manufacturers and consumers are sucking in energy at an ever-increasing rate.

Where will prices head next?

Many people scoffed when analysts from investment bank Goldman Sachs said in 2005 that prices could eventually top $100 a barrel. This now seems a real possibility, although analysts caution that the market remains volatile.

“There is every reason to suppose the price could hit $100,” says Platt’s John Roberts.

“At the same time, one good thing goes right and the price goes tumbling back down to $70 or $60.”

What the expert is saying about this?

‘$100-a-barrel oil’

Sir Bill Gammell is the chief executive of Cairn Energy. He’s a former Scottish rugby international who went to school with Tony Blair and knew George Bush when he was just a young Texas oil man with a famous father.

I think we might see $100 oil in the next five years

Sir Bill Gammell, Cairn Energy

Sir Bill’s company was exploring for oil through the lean years of the 90s when the price of a barrel of crude was hovering around $20 a barrel. Today the price is close to $60, and Sir Bill thinks it may go higher because supplies can barely keep pace with demand.

“I think we might see $100 oil in the next five years” says Sir Bill. “We won’t see $20 again.”

Is It too early to talk of an energy “crisis” ? Or It is perhaps ?

Steam rising from power plants over Moscow

Fossil fuels have been the cheapest and most convenient so far

But take your pick from terms like “serious concern” and “major issue” and you will not be far from the positions which analysts are increasingly adopting.

The reason for their concern can be found in a set of factors which are pulling in glaringly different directions:

  • Demand for energy, in all its forms, is rising
  • Supplies of key fuels – notably oil and gas – show signs of decline
  • Mainstream climate science suggests that reducing greenhouse gas emissions within two decades would be a prudent thing to do
  • Meanwhile the Earth’s population continues to rise, with the majority of its six billion people hankering after a richer lifestyle – which means a greater consumption of energy.

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1 Comment so far

  1. Ziya Fortunato on January 28th, 2010

    Thanks for writing about this. There’s a mass of solid tech info on the internet. You’ve got a lot of that info here on your site. I’m impressed – I try to keep a couple blogs reasonably on-going, but it’s a struggle sometimes. You’ve done a solid job with this one. How do you do it?

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