It is thought that today’s oil prices are roughly 60% speculative.
With today’s US economy, the real-estate crisis, and the fall of the US dollar, as well as US security issues, the US has found it sensible to profit from the speculative gains of oil. As a result, the US has taken the position to sell the US dollar “short” and oil “long”
The story supporting the current oil bubble is of course the unrest in the east, and china’s huge demands on oil. In turn, many oil companies and refiners hoard oil, placing further inflation of the prices of oil. Investors have been trading off the basis of rumor rather than fact
On a daily basis, the price is set by traders in New York, London, and a small market in Dubai. As one other answer says, they speculate about the future price (though such traders also set the price on the spot market, for small volumes for actual delivery), and their pricing is based on human whims and worries. There’s no way the price is 60% speculative (nor, IMHO, was it in 2008 when the ref in the other answer was written – it was just a useful scapegoat). For much of 2010, the price, as set in the markets, followed traders’ perceptions of the end or the continuation of the recession, and generally oil prices followed the ups and downs of the stock market.
In the longer haul, the price is controlled ultimately by supply and demand (and traders’ perceptions of supply and demand), and with the US as the largest consumer, that demand is the single largest factor in the price. China’s dramatically increasing consumption of all commodities is a factor, but generally US consumption is the largest factor, and that factor is controlled by American drivers who (in all forms of transportation) use 70% of US oil consumed. So, if you are an American, you are who sets the price – together with your fellow Americans and their driving habits.
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