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Archives: Will we see record-high oil prices?

Originally published in March 2011
Simon Nguyen

Oil prices in the United States have made steady gains over the past year. In fact, oil prices hit $105 a barrel as recently as this month. This is in spite of the fact that the U.S. economy has yet to fully recover from the recession. The country’s unemployment rate remains stubbornly high, while its housing market is still in a malaise state. The persevering prices are rather alarming, as high oil prices may be sustainable.

The current run-up in oil prices can be mostly attributed to market speculation. Case in point, world oil supply actually hits an all-time high in February. At the same time, oil demand in the first quarter of 2011 is expected to be lower than that of the previous quarter. While the U.S. economy is clearly growing again, there is just not enough robust demand for petroleum in the U.S. and the world to justify triple-digit oil prices.

The fact that speculation has been the main driver of oil prices is little worrisome. This means that oil prices have plenty of room to rise, when real fundamentals finally settle in. Lately, the U.S. economy has been showing signs of significant improvement. Consumer spending is on the upswing, and the private sector is hiring again. The new developments could spur economic growth and boost demand for oil in the United States.

Supply problems could also be an issue. While the unrest in the Middle East has yet to hit major oil-producing states like Saudi Arabia and Iran, the potential for it is definitely there. With the two aforementioned countries supplying 16% of the world oil stocks, a major event at one of these oil-producing states will lead to major supply disruptions. Furthermore, natural disasters seem to occur with greater frequency in recent years. It will only take one Katrina-like event to push oil prices to record level.

The good news is that oil prices still have a long way to go to reach the record high of $145.29 a barrel, set in July of 2008. The bad news is that all signs are pointing to this mark being surpassed later this year. Even if oil prices do not reach record high level, persistently high prices will still be problematic. With food inflation already affecting Americans’ pockets, $100 oil will further exaggerate the situation as businesses attempt to pass higher costs on to consumers.

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