Saturday, October 27, 2007

Low dollar helps fuel record high price for crude oil

Haris Kampouris brought this article to our attention. Most of the analytics behind it are rather simple:
Rising global crude oil demand, especially from the top consumers, the United States and China, has driven oil's current rally, helped by a weakening dollar and investment flows from pension and hedge funds into commodities and oil.

Price is rising because demand is rising (shifting to the right). China and the US are driving this increase in demand (China mostly because oil is an input in manufacturing and in the US also because of colder temperatures in the Northeast; the lower dollar as a reason is not yet accessible to year1 but the basic idea is that oil seems cheaper still to others as oil is priced in USD and the USD is depreciating. (think of a Hummer: it is priced in USD and if now you can buy a dollar with 0.71 euros instead of 0.80 euros, it is cheaper in Greece.......)

The supply side is also responsible:
Fears of a supply crunch have also helped the surge. The Organization of Petroleum Exporting Countries has signaled it is unlikely to increase supply further, and political tensions in the Middle East have increased investors' worries that some output could be disrupted

OPEC (a cartel that controls a significant chunk of world oil output) is saying that it won't raise output (so, price will not ease) and political tension in the ME area signal that producton and thus the flow of oil into world markets may be disrupted. So (back to demand), if it seems likely that price will rise in the foreseeable future then oil is a commodity that will become more valuable to possess in the future (so, it is bought and demanded now by investors).

It is also interesting that if you click on the right on the 'translate' link the same article opens up in a separate page but all words are 'hot' and clickable in a dictionary! Good for your English!

This could be a nice article for the Econ IA. More on this later.

Enjoy, and thanks to Haris.

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