Nov 9, 2005

Why are petrol prices so high?

Why are petrol prices so high?

The countries that do not produce oil, but import oil for their consumption, are feeling the impact of atrocious rise in price of oil (petrol) during the last few months. There is no sign in the economics' near future that oil prices are going to dip. These continuous rises will contribute to the higher cost of energy production and eventually affect everyone on the street.

Inevitably higher oil prices cause rises in inflation and restrict the economic growth of a nation. This is very unpopular with democratic voters which can dethrone governing political parties.

Some oil producing countries which export oil are in favor of increasing the production to try to ease the prices while some are against for obvious selfish reasons. We have seen the crude oil price per barrel rose from US$40+ to more than US60.

There are several reasons why oil (or petrol) prices are so high.

1. Increase in Demand for oil

Globally, there is an increase in the demand for oil due to rapid economic expansion. China and many other newly industrialized countries are riding on an economic boom fueling a higher demand for the precious commodity. In US, the demand has also risen due to the recovery of the domestic economy under the Bush administration. As the general population becomes wealthier, the demand for fuel hungry vehicles such as MPVs and SUVs also increase.

In China, the demand has been going up by morethan 20% yearly. China's booming economy is sucking in a huge amount of oil. Coupled together with the Olympics dateline and the construction boom, China is buying up the regional oil to fuel its demands.

2. Lower Stock in Oil producing Countries

Due to the increasing marketing and trade competition in the international arena, many oil companies in oil producing countries are operating with lower Stock in efforts to be more efficient in management. In this scenario, lower stock also means a smaller cushion against increase in demand in the market and thus prices increase subsequently. The cushion was also a protection against breaks in production especially in violence centred Middle East, ethnic clashes in Nigeria and workers strike in Venezuela.

Low US gasoline stocks and pressure on US refiners to increase production have also helped drive world crude oil prices.

3. Cartel Strategy of Opec

The countries which produce oil mainly comes from Opec and it is a known fact that they are limiting supplies to the market in an effort to lift up the oil price. Opec countries produces more that half of the world's crude oil exports. They are now very proactive in cutting production in anticipating weak oil prices.

4. Speculation

The combination of low stock and Opec's selfish action has produced hoards of greedy professional market speculators. Hedge funds and other speculators are betting on the possibility of ever rising prices thus putting huge pressure on the actual market. Actual markets are governed by real demand versus real supply. Speculation is not.

5. Middle East Conflict

The major world's consumers are very dependent on the Middle East countries for the oil. The Gulf war, unrest in Afghanistan, violence in Middle East has created fears of an interruption to their supplies.The political sabotage to the oil fields of Iraq has caused massive reduction in supplies. This has added doubt to the ability of Iraq to become a major exporter of oil like in the good old days. The Al Qaeda attacks on foreign workers have also increased tension and instability to the production of oil.

6. Political tensions in other countries

Political tensions in non-Middle East countries such as Nigeria and Venezuela have the potential to disrupt exports and drive up world oil prices. The disputes between oil companies and their Russian government have also shut down many Russian production facilities. Yukos, a Russian oil company that pumps 8.5 million barrels of oil a day (a fifth of Russia's production) is facing bankruptcy due to the government demands for back taxes.

7. Environmental Regulations

New environment regulations such as the Kyoto Agreement (limiting gaseous emissions to the environment) have place many new financial burdens on oil producing companies. Planning permissions become more and more difficult to obtain.

In the present world situation where most countries are interdependent on each other for trade and stability, an unforeseen event that happens half way round the world will now have a quicker impact on our man in the street. No longer can we work behind closed borders and personal agendas but we need to perspire hand in hand to alleviate the sufferings (high petrol prices) of everyone.

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