There are a few major factors contributing to the price increase of oil.
- The increase of demand over supply
- The weakening of US dollar
- OPEC vs. non-OPEC or the World politics
- Increasing difficulty in extraction of oil from the earth crust.
(a) The major reason in the recent years in the rise in oil prices, is the vast increase of demand of oil by the two fastest developing countries, China and India, whose population amounts to one third of the world’s population.
(b) Another interesting factor has been the USA and its dollar. The US demand has been high for most of 1990’s; that combined with India and China, the prices went up. However, in the recent times, the weakening dollar has been another factor. The oil is priced in US dollars and the dollar’s value has dropped dramatically since the turn of the century. Thus the US is paying more for the oil and hence the oil prices are high.
(c) The OPEC has been trying to amend the price increase recently by increasing the supply but the market is not entirely controlled by the OPEC. For example, Nigeria is the world’s 8th largest oil exporter. The volatile political situations and threats to lives of oil workers and oil companies have been on the increase in the past few years, which has caused in reduced supply of oil to the world market. The effect has been the increase in oil prices. There is also a contribution from the speculation by the financial sector similar to the recent credit crunch.
(d) From the technical point of view, the mankind has used up much of the easily accessible oil during the past two centuries. Although there is enough oil in the earth crust, extraction is becoming harder and expensive. Imagine the extraction from harsh and hostile environment like in the north sea when compared to initial oil wells dug on the land. The oil prices are going to steadily increase due to this gradual depletion.