This is a very tight situation for the world economy. Crude oil price is floating at around 135 USD per barrel. It may go up further. The accleration is a bit too high for developing countries like India.
The reasons behind it.
According to the New York Times the reasons for the surge ranged from the relentless growth of the economies of China and India to widespread instability in oil-producing regions, including Iraq and Nigeria's delta region. Oil-rich nations are enjoying historic gains and opportunities, while major importers — including China and India, home to a third of the world's population —confront rising economic and social costs.
The growing economies of India and China is not the only reason behind the high price. There are many other factors. The latest surge is mainly due to the decline in U.S oil inventories announced June 4, the announcement of a decline in Russian oil production in May, and recent comments that Mexico expects further meaningful declines in oil production over the rest of this year.
Since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by 8.2 percent. "So the futures and options market has become more important than the physical supplies in driving the price. Investors are treating oil as a hedge against inflation and a falling dollar. Oil markets are part of a negative positive feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth.
It's getting very difficult for companies and countries to boost supply."It is going to be more difficult to grow supply." That's partly because some oil-producing regions, like Mexico and the North Sea, are declining. The Lower 48 states in the U.S. are very mature. Of course there are some growth areas like Brazil and Angola, but the trend is not showing that the overall oil production is likely to go up. The rising demand in Latin America and the middle east is not helping to the cause.
The oil producing countries are not too keen to increase production.They are already getting a lot of revenue through high price. So they don't need to earn revenue through extra volume. If the surge goes on the way it is now, then there will be a point where the demand will drop. The drop in demand will automatically bring down prices. There has already been a marginal decline in the US. Any where else the demand is resilient at this moment. At some point of time the economies will slow down and we might see that the demand is going down everywhere.
In the short run, oil prices are very inelastic: A large change in price produces only a small change in demand. Even If the price goes up overnight, you still have to fill your tank to get to work. However, over the long run, consumers and producers respond to higher oil prices. For example, Americans are driving less and have switched to buying more fuel efficient cars. Higher prices also encourage innovation. Battery technologies are improving so rapidly that the majority of cars sold in 10 years will be all-electric. This would certainly help drive down the price of oil. Supply is also inelastic—it takes a long time to do the exploration, drilling, and refining necessary to boost production in response to higher prices. This in-elasticity of demand and supply means that petroleum prices are very sensitive to relatively small changes in either. This means that prices can fall as steeply has they rose. The world economy can't handle the rising energy prices for too long. When the price of anything gets unbearably high, it discourages demand. The resulting drop in sales, in turn, causes inventories to pile up and the price to come down. This is a bubble which is expanding very fast. But the question is how long it will expand ? Once this bubble bursts then we might see the price settling at a much lower value.
The reasons behind it.
According to the New York Times the reasons for the surge ranged from the relentless growth of the economies of China and India to widespread instability in oil-producing regions, including Iraq and Nigeria's delta region. Oil-rich nations are enjoying historic gains and opportunities, while major importers — including China and India, home to a third of the world's population —confront rising economic and social costs.
The growing economies of India and China is not the only reason behind the high price. There are many other factors. The latest surge is mainly due to the decline in U.S oil inventories announced June 4, the announcement of a decline in Russian oil production in May, and recent comments that Mexico expects further meaningful declines in oil production over the rest of this year.
Since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by 8.2 percent. "So the futures and options market has become more important than the physical supplies in driving the price. Investors are treating oil as a hedge against inflation and a falling dollar. Oil markets are part of a negative positive feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth.
It's getting very difficult for companies and countries to boost supply."It is going to be more difficult to grow supply." That's partly because some oil-producing regions, like Mexico and the North Sea, are declining. The Lower 48 states in the U.S. are very mature. Of course there are some growth areas like Brazil and Angola, but the trend is not showing that the overall oil production is likely to go up. The rising demand in Latin America and the middle east is not helping to the cause.
The oil producing countries are not too keen to increase production.They are already getting a lot of revenue through high price. So they don't need to earn revenue through extra volume. If the surge goes on the way it is now, then there will be a point where the demand will drop. The drop in demand will automatically bring down prices. There has already been a marginal decline in the US. Any where else the demand is resilient at this moment. At some point of time the economies will slow down and we might see that the demand is going down everywhere.
In the short run, oil prices are very inelastic: A large change in price produces only a small change in demand. Even If the price goes up overnight, you still have to fill your tank to get to work. However, over the long run, consumers and producers respond to higher oil prices. For example, Americans are driving less and have switched to buying more fuel efficient cars. Higher prices also encourage innovation. Battery technologies are improving so rapidly that the majority of cars sold in 10 years will be all-electric. This would certainly help drive down the price of oil. Supply is also inelastic—it takes a long time to do the exploration, drilling, and refining necessary to boost production in response to higher prices. This in-elasticity of demand and supply means that petroleum prices are very sensitive to relatively small changes in either. This means that prices can fall as steeply has they rose. The world economy can't handle the rising energy prices for too long. When the price of anything gets unbearably high, it discourages demand. The resulting drop in sales, in turn, causes inventories to pile up and the price to come down. This is a bubble which is expanding very fast. But the question is how long it will expand ? Once this bubble bursts then we might see the price settling at a much lower value.
