http://biz.yahoo.com/ap/080506/oil_prices.htmlSummary:
According to this article, oil prices hit a record high of $122 a barrel just yesterday.
Predictions suggest that it could continue to rise to $150-$200.
One year ago, they were only $62 a barrel.
Let's look at some parts of the article.
1) "Analyst Arjun Murti said in a research note released Monday that prices would ultimately force demand to fall sharply."
As oil prices rise, cost of production of many firms will rise, since oil is an important energy resource. In order to lower costs, firms will use less oil/energy in favour of other resources, such as technology, manpower etc.
Also, as petrol prices rise, other forms of fuel become competitively priced, such as electricity, biofuels and hydrogen. This will lead to some people switching to the alternatives. The above factors will lead to a decrease in demand for oil, hence oil prices are expected to ultimately fall.
2) "But there is a type of investor who responds to such predictions by buying."
Just like investors who hoard and dishoard gold to make profits, people can also buy oil now, due to speculation that prices will continue to rise. This increases the current demand for oil, further increasing its price.
3) "A falling dollar on Tuesday also gave traders reason to buy."
Here's something new. The US dollar has been falling from about 1.7 SGD to about 1.35 right now. As the US dollar gets weaker, people will start to invest in "commodities such as oil as a hedge against inflation". (similar to investing in such commodities as gold, stocks, bonds, etc.)
"A weaker greenback makes oil cheaper to investors overseas." I don't really understand this part, but this causes quantity demanded to increase since (relative?) price of oil falls. So the actual price increases. Which makes me wonder, how do people invest in oil? Where do they keep all the oil they've bought??
4) "Investors are also increasingly concerned about falling oil production in Russia and Mexico, which are both major oil producers.", "Supply disruptions in Nigeria and northern Iraq."
Supply decreased, and is expected to decrease further, fuelling speculation that prices will rise. So people buy even more. It's all OPEC's fault. I think.
5) "Analysts are split over how high gas will go... some analysts to say gas is close to peaking, others predict the fuel will follow oil's upward surge."
This is due to the fact that gas and oil are close substitutes, so their cross elasticity is quite high. As price of oil increases, demand for gas increases, increasing the price as well. I personally think prices of gas will increase, since overall demand for energy increases due to economic development which means more firms, or in the case of developing countries, more use of electronics (?).
- Jeremy (yay econs rep finally posted!)
