Introduction Crude oil is one of the primary sources of energy for the world. There has been a sharp increase in the prices of oil between the periods 2005 to 2008. The oil price rose from $60 per barrel in Aug 2005 to $ 147.3 per barrel in mid 2008 (United Nations Report, 2008). Many reasons are being cited for these spikes in the oil prices. Some of these are discussed below: Potential Causes of Rising Global Oil Prices Slackened World Oil Production The foremost reason cited for the rising oil prices is the declining production from the world's major oil producing countries such as Russia, Saudi Arabia (Chazan & King, 2008).
The production of oil in Russia has been showing significant decline since 2005 (Foucher, 2008). The global oil production is also stagnating (Connor, 2009). Peak Oil The production rate of any oil reservoir increases exponentially until it reaches its peak. After reaching the peak, the production rate starts declining until the reservoir is depleted. The global oil production is quickly moving towards its peak production rate. The International Energy Agency has predicted that global peak oil will be reached by 2020 (Connor, 2009).
The production from existing oil fields is decreasing. The oil production in many non- OPEC countries has already reached the peak (Climate Progress, 2009). The OPEC (Organization of Petroleum Exporting Countries) nations hold 80 percent of the world’s oil reserve fields. The new oil field discoveries in OPEC nations are declining sharply. Due to this reason the supply share of OPEC is also decreasing. Rising Demand from Developing Economies The world wide demand for oil is ever-increasing but the global oil supply is flattening over time.
The demand for oil by developing economies such as China, India is rising exponentially. The worldwide demand for oil has been projected to increase more than 35 percent by 2030 (EIA, International Energy Outlook 2007). The prices of oil are rising due to high demand. Speculation Another cause for the rising oil prices is speculation by financial institutions, hedging agencies and traders etc. The speculators are investing billions of dollars in oil futures to take advantage of changes in the prices of oil and to make profit out of rising pricing.
The increased investment into oil futures is one of the significant factors contributing to sustained rise in the prices of oil (The Role of Market Speculation in Rising Oil, 2006). Political Instability in Oil-Exporting Countries The political turmoil in the largest oil exporting countries (especially Middle East) is also a major cause for rising prices of oil. Political instability has discouraged investments in the oil infrastructure of these countries. Production level of oil in Iraq has still not reached its pre war days (The War in Iraq Has Contributed to Pain, 2008). Conclusion The increasing demand, dwindling oil supplies, and speculation have been the major causes of rising oil prices.
Many other reasons like hurricanes in the Gulf of Mexico have also impacted the prices of oil due to shutting down of oil refineries. References Chazan, G. and King N. Jr. (April 15, 2008) “Russian Oil Slump Stirs Supply Jitters”, The Wall Street Journal Article Climate Progress (February 9, 2009) “Merrill: Non-OPEC Production has Likely Peaked, Oil Output Could Fall by 30 Million bpd by 2015.” Connor, S. (August 3, 2009) “Warning: Oil supplies are running out fast, ” The Independent Science EIA’s Annual Report (2007) International Energy Outlook Foucher, S.
(April 24, 2008) “Russia’s Oil Production is About to Peak”, The Oil Drum The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back On the Beat (2006) U. S. Government Report The War in Iraq Has Contributed to Pain at the Pump (April 30, 2008), Democratic Caucus's Senate Journal United Nations Trade & Development Report (2008) Current Trends & Issues in the World Economy, Chapter 1