Why is the price of oil becoming more and more expensive?



  1. 0 Votes

    Part of what drives the price of oil is, of course, the law of supply and demand. As you probably know, when there is a low supply of something that is in high demand, prices rise, and if there is a high supply of something that is in low demand, prices fall. However, this isn’t the only force working on oil prices today.

    In 2008, during the recession, oil prices continued to rise despite the decreased demand on oil (which is used to create gasoline.) It seems that with businesses failing, meaning less commercial transportation, and with people having generally less money, which translates to less travel, demand for oil would have gone down. Since we didn’t see an equal drop in oil production, it seems that the price should have decreased as well. But that’s not what happened.

    You see, oil price is also dependent on what is called the “futures” market. People can invest money in the stock market for where they think prices will rise. So, they put their money into oil “futures” because they thought that prices would go up. Since so many people did this so rapidly, it actually forced the price of oil to rise because of speculation. The stock market is a little tricky, because the prices are more or less based on what people think about it. If enough people think the prices will go up or down, then they will, regardless of concrete facts about businesses or products. It’s a little screwy.

    In addition, the decline of the dollar’s power in the worldwide market has something to do with it. Many oil contracts around the world are in dollars, rather than euros or pounds, and when the dollar declines on the world stage, that means profits decrease for the oil giant OPEC. They don’t like seeing their profits decrease, so they raise the price of oil in response. However, they don’t want it to go too terribly high, because they’re in competition with alternative fuels, so they walk a tight line of pricing.

    There are a lot of facets to it, but those are the basic reasons, quickly explained. Does that answer your question?

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