Why is the Price of Oil Rising?

Rising Demand

Despite attempts by Saudi Arabia to increase supply, the price of oil has continued to rise. The main reason for the rising price of oil is the increased demand that we are seeing, especially in the developing world. Countries such as China and India are experiencing rapid rates of economic growth. Because their population is so large ( a combined population of over 2.5billion) this rapid expansion is causing an unprecedented rise in demand for oil.

Inelastic Demand.

With many goods higher prices lead to lower demand as people switch to alternatives. However, demand for oil is notoriously inelastic because of the lack of available substitutes. In the long term, demand may become less inelastic because substitutes develop; but, at the moment we still search for those elusive alternatives.

Disappointing yields from Known suppliers

Many countries have struggled to increase supply as much as they like. US, UK, Russia and even many Arab countries have found it difficult to meet the rising demand. Their is still plentiful oil supplies (although there is a significant debate about the true extent). However, as more oil is extracted, it becomes increasingly expensive and difficult to extract oil. Certainly now that oil is over $140 a barrel it will encourage oil exploration in less accessible areas such as Siberia and the Antarctic. But, even it if is possible to increase supply from these areas, it will take time for these extra supplies to come on track.

Speculation

The price of oil does not just depend on economic fundamentals. There is also an element of speculation with investors predicting oil prices will keep rising, therefore, they are buying oil futures pushing prices up.