The price of oil reached another record high yesterday – $125
- Brent Crude oil reached $126
- US light crude oil reached $128 before setting back to $127
This means that, even adjusted for inflation, oil is now close to the all time high, last reached in the 1970s.
What are the reasons behind the Recent Increase in price of oil?
- Strong Economic Growth. In particular growth from China and India have caused increased demand for oil and related products
- Shortage of Supply.
- Speculation – People have been speculating on the continued rise in price of oil. It has become an alternative to the weakening dollar.
- Political Tensions – With the lingering threat of invasion of Iran, commentators still feel that events in the middle east could disrupt future supplies and cause higher prices.
Forecasts for the Future
Speculation or Shortage?
Some members of OPEC dispute that there is a fundamental shortage of oil. They argue that there is plentiful supply of crude oil. Therefore they argue that the recent price rises are not based on economic fundamentals, but a speculative bubble. If this is the case, oil prices could easily fall next year when market sentiment changes.
Global Growth. Some feel that the US economy is heading towards recession, because of the weakness in the housing market. However, US growth is still remarkably resilient and Global growth is being bolstered by the strong performances from the Chinese and Indian economy. With no imminent slowdown in economic growth from China, demand for oil is likely to keep rising.
The Dollar. If the dollar continues to remain weak, this will strengthen oil prices. Yesterday, the Fed said interest rates are unlikely to fall in the near future; this may help stabilise the dollar. See predictions for US dollar 2008