Are High Oil Prices Caused by Oil Supply Shortages or Oil Speculators???

The result is that the U.S. and world economies are slowing down due to the high oil prices, compounded by escalating prices for other natural resources, the sub-prime mortgage crisis and housing downturn in the U.S. and many other countries, and the world-wide credit problem impacting financial institutions.

At current oil prices, there is a huge transfer of wealth from countries that are net consumers of oil to countries that are net producers of oil. Unfortunately, the U.S. and most of its people are losers. With the current price of oil at over $140 a barrel, the U.S. is sending in the range of $800 billion a year to other countries, draining bank accounts of individuals and the U.S. Treasury.   

So let’s get back to the question, Are High Oil Prices Caused by Oil Supply Shortages or Oil Speculators? The demand for oil has been increasing quickly – We know that the worldwide demand for oil has reached all time highs until very recently. In the U.S., sales of gas-guzzling SUVs escalated due to relatively inexpensive gasoline, a perception that SUVs are safer than cars, family lifestyles that include car pooling of children, and other reasons. Add to these reasons the fact that automobile manufacturers were making much more selling SUVs than fuel-efficient cars. At the same time, car sales in countries like China and India are escalating at a very fast pace.

The worldwide supply of oil has peaked, at least for now – The production in some ageing oil fields around the world has started to decrease. Political issues, wars and terrorist attacks have decreased oil production in countries such as Venezuela, Nigeria, Iraq and Iran, among others. In Russia, some people attribute the decline in production to increased taxes for oil producers. In the U.S. moratoriums on off-shore drilling and drilling in large known oil fields such as ANWR (Alaska) and in North Dakota are ensuring that oil supplies will remain tight for the foreseeable future. Huge shale oil reserves have been found in an area in the West, in an area that includes northwest Colorado and adjoining parts of Wyoming and Utah. It is more costly to produce oil from shale oil reserves, but at today’s high oil prices, shale oil is economically feasible. Production from this huge source, with possibly up to one trillion barrels of oil, has not been approved. Oil companies are not yet drilling in large areas of the Gulf of Mexico where drilling for oil is currently authorized. Can it be that oil companies are keeping supplies low on purpose in order to keep prices high, generating higher profits?

The case is clearly made that supply and demand issues are contributing to the high price of oil. But how about oil speculators? The tight supply and demand situation, coupled with threats to the oil supply due to possible terrorist attacks, hurricanes, political turmoil and intentional reductions in supplies by oil producers provide the perfect scenario for investors and speculators. Whenever investors and speculators see an opportunity to make money, they take action. Given all of the financial and economic problems facing the world today, investors and speculators need a promising place to put their money and oil has proven to be the best place to put large sums of money over the past year or two. As investors and speculators have poured money into oil futures and oil stocks, the price of oil and oil products has escalated quickly. As more and more money pours into oil futures, the price of oil futures and the price we pay for gasoline goes up and up. Some oil experts and non-experts, including the Saudi Oil Minister, have stated that they believe speculation is contributing $30 – $60 to the price of every barrel of oil. .

The conclusion – Supply and demand problems are a cause of high oil prices, and oil speculators and investors are using the supply and demand situation to drive up the price of oil even further. Can anything be done to curb speculation and to address the tight worldwide oil supply and demand situation? In the U.S., Congress can take action to curb speculation, and hearings are underway. Margin requirements can be tightened and trading restrictions can be placed on institutions and individuals that do not take possession of oil. Congress and the President can also authorize drilling for oil in a responsible way now as part of an initiative to become energy independent. The President and Congress can also establish an energy policy and plan that aggressively focuses on energy conservation and the development and implementation of alternative energy sources. Around the world, responsible governments can take similar efforts.