Why are oil prices rising so fast? (2)

Brown’s analysis of the causes of record oil costs was at odds with the Opec president, Chakib Khelil, who reiterated his view opposing increased production, saying “the price is disconnected from fundamentals” of supply and demand. “We believe that the market is in equilibrium. The price is disconnected from fundamentals. It is not a problem of supply.” The Indian finance minister, Palaniappan Chidambaram, agreed, saying producers and consumers should “wrest control” of trading by agreeing to restrict prices.”Surely demand and supply cannot explain what has happened over the last 12 months,” he said. “Oil prices were $70 a barrel in August 2007 and how is it that they’ve doubled when there has been no dramatic change in demand?”

This is a quote from a news story today on the weekend oil summit in Saudi Arabia.
I have to say that – as will be clear from my posting of two weeks ago – I’m with OPEC rather than Brown on this one. Markets are not always rational.
If the cause is rising demand, then prices will continue to rise because demand will continue to rise but supply will probably only increase marginally (in the short term anyway). If the cause is not rising demand but more probably panic and speculation, then we can expect that sometime in the future prices will fall back, although probably not to the level before the current crisis took hold.
Let’s see what happens. Meanwhile consumers around the world are suffering.


  • tarig salih

    I don’t think that increasing demand is a reason because if demand increases unemployment should decrease and we didn’t see any reduction in unemployment since Aug 2007 so most probably these increases is due to a reduction in the oil stock in some part of the world, political issues such as putting some pressures on some producing countries in the Middle East (non-food producer) to produce more.

  • Yog

    Well that’s a bit true. Supply is constant. Demand however is being fuelled by speculation. Just look at the amount of commodity derivatives being traded!!!

  • Joe Duavit

    We are forgetting the impact of the war. Iraq’s oil production has been restricted and the Saudis are holding back. China and India must have brain freeze with the way they are sipping oil. Their growth is astounding. Oil producers see this and thereby collude. The only good thing I see from all of this will be the shift to alternative sources and a greener earth.
    In the meantime someone is getting rich. The Bush administration promised the world something different. Call it paranoia but one might argue that the Iraq war is fulfilling its mission statement.
    Let Iraq produce its potential output. Help Canada with its black tar. Police the conglomerates. And maybe start walking more. The only way to bring the price down is to lessen our own demand.