What is keeping oil prices so high?

published Monday, 23 June 2008
Fears of disruption to supplies is one factor behind the sky-high price
Despite an emerging global consensus that oil prices are dangerously high, there seems little chance of the cost of oil falling significantly in the near future.

Analysts say measures agreed at Sunday's crisis summit in Jeddah are unlikely to have a dramatic impact on market trends.

But what is keeping prices close to record levels of almost $140 a barrel?



WEAK US DOLLAR
The sharp jump in prices since 2005 has coincided with the plunge in the value of the dollar against other leading currencies
Dollar weakness encourages financial investors to look for other more lucrative investment opportunities, with oil top of their list
As oil is traded in dollars, it also makes it cheaper to buy
Signs the US economy may be on the brink of recession have undermined the dollar, boosting prices. Prices rose $11 on a single day last month when the unemployment rate rose

SUPPLY CONCERNS

Analysts say growth in global supplies is worryingly failing to keep pace with growth in demand
Supplies from countries such as Russia are thought to have peaked and finding new sources of oil is difficult and expensive
Increasing reliance on members of the Middle-East dominated oil producers group Opec, many of which are already pumping as much oil as they can
Saudi Arabia is one of few countries with spare capacity but it has been reluctant to boost output substantially

DEMAND GROWTH

Global thirst for oil is intense. Demand has risen by about 3 million barrels a day since 2005 and is expected to rise by 32 million barrels a day in the next two decades The US remains the world's largest oil consumer and high individual fuel usage continues to put pressure on crude stockpiles
Fast-growing China and India are forecast to account for 40% of the growth in oil demand by 2030, as industry grows and demand for travel increases

POLITICAL INSTABILITY

Much of the world's oil is concentrated in volatile regions, leading to fears of frequent and unpredictable disruptions to supplies
Despite oil output being at a six-year high, Iraq is still beset by violence while militant groups in Nigeria's main oil-producing region have recently impeded about a quarter of its output
Tensions over Iran's nuclear programme. There are fears that an Israeli attack on Iran's nuclear installations could trigger a wider conflict and threaten traffic through the strategically vital Strait of Hormuz, used to ship 40% of the world's oil.
MARKET SPECULATION
Oil exporters say the price surge cannot be explained by the fundamental ratio of supply to demand and point their fingers at market speculators
It is claimed that some traders are making huge amounts of money betting on the direction of prices, in turn forcing prices higher
Others maintain that traders are simply hedging their investments against future market developments to reduce risk
US regulators are looking for evidence of market manipulation while the IMF is examining the role of traders in the price spike