Oil Prices

As oil supplies become increasingly scarce and demand rises, oil prices are steadily increasing. Disruptions in the supply chain may occur at oil wells, during transportation from wells to refineries, at refineries, or along the pipelines that transport oil to different parts of the country. In 2005, some of the most powerful hurricanes in recent history passed through the Gulf of Mexico and hit the major oil refining regions of the Gulf coast. These events had a profound impact on oil prices across the United States that will be felt for some time to come.

Alongside supply issues, increased demand also plays a role in driving up oil prices. Demand for oil varies, just like demand for any other commodity. Seasonal increases in oil consumption occur each winter.

While recent data suggests that consumers are buying fewer sport utility vehicles and trucks that consume large amounts of gas, these vehicles are still extremely popular. The number of vehicles per family, and average distances driven per vehicle in a given year, has also increased steadily over the last decade. While industries in the US are becoming less reliant on oil and more energy-efficient, increased consumer use of oil offsets these advances.Historically, oil prices were affected largely by major political events and wars. Since 1983, crude oil has been traded as a commodity on the floor of the New York Mercantile Exchange (NYMEX).

Often volatile market forces are increasingly driving oil prices, and the earlier checks that could be instituted through governmental price controls or production and refining quantity caps are less powerful. The stabilizing forces of controlled production and supply no longer counter the sudden swings in crude oil futures that violence in Nigeria, or war in Iraq, may induce. As oil supplies continue to dwindle, alternative fuels such as compressed natural gas may help make up some of the shortfall in energy needs.

By: Peter Emerson