Sunday, June 15, 2008

High Oil Prices

The first two oil shocks banished oil from power generation. How fitting if the third finished the job and began to free transport from oil's century-long monopoly.

The oil price | Recoil | Economist.com.


This explains Saudi’s scramble to increase its output to record levels and call for emergency meeting for oil exporting countries. The record high oil prices are counter productive to both producers and consumers. While consumers suffer higher expenses, producers risk lower future consumption due to shift to alternative sources of energy or breakthrough in technology.


The question to be asked is what causes high oil prices? The natural answers points to supply and demand. Increasing demand by emerging economies and limited supply causes the increase in price. But there is a lot of finger pointing to speculators. What is the role of financial speculation in oil prices? Some attribute speculation to 40% of the price of oil and the rest due to supply and demand. This is hard to prove since speculators do not take actual delivery of oil which is the argument that their effect is minimal. No matter what the cause is, oil producers should be on alert as high oil prices are not necessarily good news. 

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