What is Causing the Steep Increase in Oil Prices

The world has been experiencing record high oil prices for a while now. Is this a temporary phenomenon, or an issue we have to adopt to in the long term? After all, the oil price was a quarter of the current price just a few years ago. Sadly, the geopolitical and technical factors pushing the price higher and higher every month seem unlikely to disappear in the short term.One of the major factor is the growing tensions between the US and Iran. Tehran's main weapon is not its nuclear program, it is its oil market, which is the fourth biggest in the world. Not only would any more serious tensions disrupt output, furthermore could Iran block the Strait of Hormuz, a strategic weak point for oil exports.

Any disruption would be hard to swallow, given that most oil producers are already working close to capacity.Then there is also Nigeria, which has been experiencing increased tensions in the Niger Delta, resulting in a 80% deduction of the usual standard barrel-per-day exports.Moreover, there are refining capacity shortfalls, as no new refineries have been built in Europe and the US over the past 30 years, and existing facilities are old an desperately need repair. In addition, most oil producers are finding it hard to meet the surge in demand, and spare capacity is very limited.

Further demand growth from the US and China will also not put a damper on future demand, further complicating things.Overall, it's anybody's guess what will happen in the short and long term, and there is no consensus on the future trend. But one thing is certain, oil is a commodity, and it will be more and more difficult in the future to meet the high demand for this black gold; so prices are not yet set to rebound to lower levels.


Peter Kopitz is currently living in Bangkok, Thailand after graduating with Honors from the University Of Chicago Graduate School Of Business with a Masters Degree in Business Administration. He is actively involved in researching economic and political development in Thailand, focusing primarily on property development, security analysis and investment banking. Hawaii Home Loans | Honolulu Realtor | Hawaii Rentals.

By: Peter Kopitz

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