How Oil Prices are Determined
Economic philosophy says that on the open market, prices are determined by supply and demand. From a clinical perspective, that is true, however there are many factors influencing perceived supply and demand. Before Wall Street made derivatives commonplace, the prices of commodities were more straight forward. These days, the commodity prices are impacted profoundly by future expectations. The price of oil is affected by the confidence that people have in stable markets, by international tensions and the likelihood of war. When markets perceive risk and possible war that could reduce supplies, prices reflect that.
The world uses about 84 million barrels/day and that will rise to about 118 million barrels/day by the year 2030, according the Government Accountability Office. CNN reports that we produce only about 500,000 barrels/day above use rates, a small difference of only 0.6% above use rates. That means that any hiccup in the supply of oil can result in excess demand. At present, the psychological factors in the oil market loom large. The unsettled situations in the Middle East cause people to speculate on the future of the supply of oil. The current high price of gas is mainly due to neo-con war-mongering. Most recently, Bush/Cheney and Israel have been advocating pre-emptive attacks on Iran, despite the N.I.E. report that indicated with "high confidence" that Iran stopped developing nuclear weapons in 2003.
The other reason for $100/barrel oil is that the U.S. Dollar is being devalued, due to deficit spending. The U.S. government owes over $9 trillion and we also have a major trade deficit as well. Thus, America must continually find buyers for our debt. The result is that the dollar is losing its reputation for stability and some oil producer countries are refusing payment in dollars. Already the Canadian Dollar is worth more than the American Dollar, something which was unimaginable only a few years ago. The trend shows that the U.S. Dollar is losing value rapidly and with the large federal deficit, the pace of the devaluation is likely to pick up steam.
While proven reserves indicate there is enough oil for a few decades into the future, eventually we will exhaust all petroleum reserves. That means that America (and the world) needs an aggressive program to develop sustainable energy sources to achieve energy independence. Oil is non-renewable, but there are other energy sources which are both renewable and clean. Geothermal, wind, solar, wave and hydroelectric are examples. Coal and nuclear are neither renewable nor clean (both have toxic side-effects and produce green house gases), although some people make such claims. Some presidential candidates advocate a "man to the moon" program to focus attention and resources on energy self-sufficiency. Otherwise, we will be held hostage to the economics of oil and everything that brings.
