5 reasons Gas Prices are so High
- Demand
Strong economies worldwide have led to rising demand for oil for years. Consumption is expected to rise even faster in 2008 than in 07, according to the Energy Information Administration, the Energy Department's statistical arm. Demand growth is strongest in China, the USA and the Middle East.
- Supply
Supply has lagged: OPEC in 2006 and early 2007 cut production; the oil cartel increased production at the end of last year and is expected to gradually boost production throughout 2008. At the same time, production outside of OPEC member countries has not kept pace with demand gains. Worldwide, demand will outpace supply through the first quarter, the EIA estimates.
- Geopolitical worries
Much of the world's oil reserves are in the Middle East, where tensions have led to concerns about the stability of oil supplies. That has led investors to add what's called a risk premium into oil prices. Wednesday, violence in Nigeria, the 12th largest oil producer, helped boost prices.
- Dollars
Because oil is traded in dollars, the falling value of the greenback has affected oil prices in several ways. For consumers in countries whose currencies have appreciated against the dollar, the increase in oil prices has had less of a bite because their currency can stretch further to buy dollar-denominated goods. That has kept demand strong in those countries. And for oil-producing countries, the decline in the dollar means they have less purchasing power for every dollar's worth of oil sold. That may lead them to keep oil off the market to prop up prices.
- Speculation
Money has flowed into oil and other commodity markets, leading to some finger-pointing that investors with no interest in owning a drop of oil are helping to drive up prices. While that is a factor, EIA Administrator Guy Caruso says investors wouldn't be coming if the supply/demand balance didn't support higher prices. The speculation is really a symptom of the market fundamentals, Caruso says.
Source: Energy Information Administration
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Print | posted on Thursday, January 03, 2008 5:23 PM