Jun 26, 2008

What is keeping oil prices so high?

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?
· 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
· 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
· 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
· 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.
· 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

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