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Oil Prices

By | July 2010
Page 1 of 5
The rise in the price of oil can be traced to a a simple factor, but there are several other contributing factors.

The simplest explanation is that the demand for oil is greater than the current production. When demand exceeds supply, price will increase as people are willing to pay more to ensure that they get their scarce resource (oil in this case).

Depending on your political views and knowledge of the situation, you may also believe that the production of oil is much lower than capacity because certain middle-eastern countries know that America depends on oil imports more than other countries. An increase in oil prices will lead to a slightly weaker US economy.

If you want to know why gas is more expensive, see the simple reason above but also factor in the greed of the oil companies. Unfortunately, Americans have put themselves in a position where they consume very large quantities of gas, and they have no other legitimate fuel alternative. What this means to gas companies is that they can increase the prices substancially, and because Americans "need" so much gas, they will be forced to buy it at the higher price (or go without driving).

The other reason is that OPEC is a large cartel arrangement that has the sole purpose of profit maximisation as a whole. Thus they set the industry MR and MC to maximise profits for the industry as a whole as opposed to competing amongst eachother - this allows OPEC to effectively limit the output so that it corresponds to the profit maximising level and drive up the price.

According to one estimate world demand will grow by 1.3% per year by 203070 %of the increase in oil demand will come from developing countries, notably
India and China, where oil demand grow by 2.5 %.
Why Oil prices are rising •Economic strengthening in the US •strong economic performance in developing Asia •1990 to 2003 world demand for oil grew at the rate of 1.3%. •Some of the countries in Asia have started building their own...
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