Why Expensive Oil?

How to explain the oil price? Why is it so high?

When Bush invaded Iraq in 2003, the average price of oil that year was about $27 per barrel.($31 in inflation adjusted 2007 dollars). The price rose another $10 in 2004 to an average annual price of $42 (in 2007 dollars), another $12 in 2005, $7 in 2006, and $4 in 2007 to $65.

But in the last few months the price has more than doubled to about $135. It is difficult to explain a $70 jump in price in terms other than speculation.

In my opinion, the two biggest factors in oil’s high price are the weakness in the US dollar’s exchange value and the liquidity that the Federal Reserve is pumping out. In an effort to forestall a serious recession and further crises in derivative instruments, the Federal Reserve is pouring out liquidity that is financing speculation in oil futures contracts.

Saudi Oil Minister Ali al-Naimi recently stated, “There is no justification for the current rise in prices.” What the minister means is that there are no shortages or supply disruptions. He means no real reasons as distinct from speculative or psychological reasons.

The prospect of an Israeli/US attack on Iran has increased current demand in order to build stocks against disruption. No one knows the consequence of such an ill-conceived act of aggression, and the uncertainty pushes up the price of oil as the entire Middle East could be engulfed in conflagration. However, storage facilities are limited, and the impact on price of larger inventories has a limit.

[Excerpt of an article by Paul Craig Roberts, a former Assistant Secretary of the US Treasury]

No comments: