The Cause and Effect of Rising Oil Prices

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Since 1998, the world price for crude oil has spiked from a historic low of $15.70 per barrel to see a 1000 percent increase to near $150 per barrel in the summer of 2008. This sharp and rapid increase has often been explained in terms of supply and demand and blamed on the US overuse and the rising demand in the developing countries.


Industries are forced to scale back production to keep costs in line. Worldwide inflationary pressures push prices higher around the globe. These actions and reactions fundamentally change the way the world works, plays and lives. The necessity of oil drives prices at the margins and the resulting shock pushes consumers and industry to scale back use, limit the demand, and create alternatives for petroleum products.
Oil is a commodity that has a demand driven by necessity, is of limited supply, and can therefore be priced at the cost that the last, and highest bidder is willing to pay. This aspect of oil makes it a commodity that is naturally volatile in price. While the news and fear mongers warn of a worldwide oil shortage and a bottleneck in refinery capacity, this alone cannot explain the sharp increase in prices. In 2007, the world demand for oil was 85.7 million barrels per day and a refinery capacity of 85.4 million barrels per day (Doggett 2008, Worldcrudeoilrefiningcapacity 2007). In addition, the modest increases in demand have been linear and not a reflection of the volatile spikes in price. ...
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