What is Causing the Steep Increase in Oil Prices?

By Peter Kopitz

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The world has been experiencing record high oil prices for a while now. Is this a temporary phenomenon, or an issue we have to adopt to in the long term? After all, the oil price was a quarter of the current price just a few years ago. Sadly, the geopolitical and technical factors pushing the price higher and higher every month seem unlikely to disappear in the short term.

One of the major factor is the growing tensions between the US and Iran. Tehran’s main weapon is not its nuclear program, it is its oil market, which is the fourth biggest in the world. Not only would any more serious tensions disrupt output, furthermore could Iran block the Strait of Hormuz, a strategic weak point for oil exports. Any disruption would be hard to swallow, given that most oil producers are already working close to capacity.

Then there is also Nigeria, which has been experiencing increased tensions in the Niger Delta, resulting in a 80% deduction of the usual standard barrel-per-day exports.

Moreover, there are refining capacity shortfalls, as no new refineries have been built in Europe and the US over the past 30 years, and existing facilities are old an desperately need repair. In addition, most oil producers are finding it hard to meet the surge in demand, and spare capacity is very limited. Further demand growth from the US and China will also not put a damper on future demand, further complicating things.

Overall, it’s anybody guess what will happen in the short and long term, and there is no consensus on the future trend. But one thing is certain, oil is a commodity, and it will be more and more difficult in the future to meet the high demand for this black gold; so prices are not yet set to rebound to lower levels.

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High Oil Prices Do Cause Economic Slow Downs

By Lance Winslow

Some say that higher oil prices will not affect our nations economy and they point to last years high oil prices and the cost run ups. Indeed good point on their behalf, but realize there was lots of money printing going on and lots of borrowing and spending too.

But also realize that when middle class America starts cutting purchases we will see America sneeze a little and that means many smaller economies in the World we purchase from will catch a cold. What does high oil prices have to do with it all? Well if people spend more on fuel, then they spend less on consumables meaning retailers cut back on buying and inventory. So consider this a moment will you?

With Inventories being less for large retailers, it also means that small manufacturers who want to service the large retailers will have to be able to adapt or die to the relentless need for that retailer to move products faster and faster and inventory the products at their manufacturing facilities, and then move them quicker. Next consider getting the stuff to market and the cost of fuel too. The retailers suppliers will have to cut costs, as retailers hold payments and accounts payable for longer. And the suppliers will not be able to afford to run their own trucks because the fuel costs will take them out of the running to offer the lowest cost to the purchasing departments of retailer, store the product, make the product, ship the product and offer the best terms on payment to the retailer.

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