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'Perfect Storm' of Factors Driving Up Oil Prices, Say Experts

Since the beginning of the decade, gasoline prices in the United States have roughly tripled, while the global price of a barrel of oil has risen even more. The trend has inflicted pain on consumers and petroleum-dependent industries while massively boosting the fortunes of oil-producing nations and petroleum companies. Why are oil prices so high? VOA's Michael Bowman reports from Washington, the answers vary greatly.

American motorists appear to grow more dismayed every time they go to a gasoline station. The average price for a gallon of fuel rose nearly six cents in the past week alone (about 1.3 cents per liter), and is more than 50 cents higher than a year ago (about 12 cents higher per liter).

While consumers complain, others are pointing fingers.

For Ray Carbone, who heads the New York-based energy trading firm Paramount Options, the issue boils down to three words: supply and demand. He notes that the world is consuming more fossil fuel each day, led by large, rapidly developing countries like China and India, at a time when global oil production is stagnant.

"The demand numbers coming out of Asia, although slower than a year or two ago, have certainly put into the fore [shown] that the U.S. is not the big, big driver in demand that it used to be," Carbone said. "And that seems to be what people are having trouble coming to grips with, I think."

Despite rising oil consumption, the world's largest oil cartel, OPEC, has resisted calls to boost production. But OPEC officials are offering no apologies, and scoff at the theory that inadequate supply to meet rising demand lies at the heart of today's elevated oil prices. OPEC Secretary General Abdullah al-Badri.

"The price has nothing to do with supply and demand," he said. "Other factors affect the price. OPEC will not hesitate to increase production if we think the higher price is because of a shortage of oil in the market. But we are confident that it is not a shortage of oil; it is something else."

Who is right in this debate, the energy traders or OPEC?

They both are, according to Steve Hanke, professor of applied economics at Johns Hopkins University and a senior fellow at the Washington-based Cato Institute. Hanke says, without a doubt, current demand for oil exceeds supply.

"We really had a surge in demand, and a lot of this occurred as a result of rapid world growth," he said. "World growth has been increasing at a fairly high rate in the last three or four years. And to some extent it has been energy-intensive in use, because we have had a fairly large increase in the middle class in a lot of these developing countries."

But other factors contribute as well. Hanke says amid uncertainty and volatility in global stock markets, many investors have poured money into commodities such as oil. This trend, combined with investor assumptions that oil prices will remain high, have helped boost prices further, which has in turn fed more investor speculation in the market.

Hanke says the weak U.S. dollar does not help matters.

"Twenty-five percent of the increase in oil prices is strictly due to the fact that the dollar has gone down by 25 percent, because oil all over the world is priced in dollars," he said.

Taken together, Hanke says, these and other factors have made for a "perfect storm" that relentlessly drives up oil prices with no end in sight.

What can be done about it? Hanke says oil prices would moderate if supply were increased and world demand leveled off or subsided. He says prices would also be lower if oil-producing nations reversed the trend towards state monopoly control of their petroleum sectors, if the U.S. government stopped stockpiling emergency oil for its Strategic Petroleum Reserve program, or if the U.S. dollar were to strengthen.

For that last suggestion to become reality, however, U.S. interest rates would likely have to rise, something America's central bank is unlikely to tolerate so long as the U.S. economy remains weak. Ironically, many economists blame America's anemic economic performance, in part, on higher fuel prices.