Soaring oil prices!

Oil prices are touching the roof. Some pundits are predicting it to soon touch $200 this year. It is already touching about $150.

Some of the questions that come to my mind when I see such high prices are - what is causing such high prices? Why are we seeing such high prices? Who is responsible for such high prices? What would be the effect of such high prices? Are such high prices sustainable?

We have been reading about this for quite some time. So let me try and answer some of these questions here.

There are number of factors that cause such high prices. In the short term the supply and demand are very much at play. While the estimated demand is on the rise because of the high growth and requirements of BRICS nations, the supply is almost constant. Secondly, there is very little investment on oil and so the estimated increase in supply to meet demand is not possible. It is estimated that supply would stay constant as OPEC is almost producing at peak level now.

Then political and economic uncertainty in oil producing countries plays a big role. Political developments like Iran doing a missile test or some terrorist scare in Nigeria results in fears of reduced supply and results in a spike in oil prices.

To add to all this , Oil prices are set through futures trading of commodities. These are not regulated yet in US and it seems that there is lot of speculation built into the oil prices now. Oil trading is primarily done by couple of banks now like Goldman Sachs. The other aspect that adds to the speculation is that the margin requirement for trading oil as a commodity is very less as compared to other commodities. This also adds to speculation and causes the high prices.

If you have answers to any of the above questions then please comment.