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What's Behind the Rising Oil Prices?For the past several months, it seems as though gasoline prices have been jumping a few cents every time you filled up your tank. With summer fast approaching - traditionally, a time when the demand for gasoline increases - there appears to be no relief in sight from higher oil prices.¹ What's causing the current spike in prices? As usual, it's difficult to put your finger on just one factor. For starters, the Organization of Petroleum Exporting Countries (OPEC) has scaled back production at a time when demand throughout the world, particularly in China and other emerging countries, remains robust. Estimates of the demand for oil in China have been increasing by 8%-10% each year, compared with 6.5% just two years ago.2 Furthermore, complexities in refinery processes (including new environmental standards), the relative weakness of the dollar abroad, and political unrest in the Middle East and Venezuela have only added fuel to the fire.3 The recent upswing in oil prices has created a ripple effect on several fronts. Not surprisingly, the trend toward higher prices has done little to allay fears on an already jittery Wall Street. These effects are beginning to begin to trickle down into the economy. For example, manufacturers of oil-based products such as plastics have been forced to raise their prices or shave profits or unrelated costs. Other industries that rely heavily on shipping their goods may be forced to pass on higher costs to consumers.4 When transportation costs increase, you could end up paying more for everything - from dinner at your local restaurant to a bottle of hair gel at the drugstore to a quart of milk at the grocer. Nevertheless, most experts continue to distinguish the current events from the crisis that crippled the economy in the 1970s. They cite greater confidence, an improved economy, stability in OPEC, and more reliance on alternative energy sources, just to name a few factors.5 Also, the U.S. economy is more service-oriented and less dependent on the manufacturing sector than it was 30 years ago. What is the future outlook? In the short term, the demand for oil shows no sign of abating, so prices are expected to keep rising or stabilize at a relatively high level. Over the long term, oil prices are expected to recede slightly, absent any political tumult, as normalcy returns. 1) Short-Term Energy
Outlook - April 2004, Energy Information Administration |
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