Anyone who owns a car knows the feeling of showing up at a gas station, and having their jaw hit the floor when they see the price they’re being charged. Over the last few years, the price of oil has continued to rise, and rise, and rise. It’s a curious phenomenon that at first confused many economists, but is now understood much better. Here are some of the many reasons that oil prices continue to rise:
Demand and Demand
The world is producing far more oil than ever before, yet in the United States (and most other wealthy countries), fuel consumption is down, thanks to electric car technology. It seems perplexing that more supply and seemingly less demand would lift prices, but demand actually hasn’t fallen: despite reduced fuel consumption, the demand for oil is still very high. Our cars are evolving away from fuel dependency, but most people still heavily rely on oil, even if they use it in smaller doses. The reality is that fuel prices could double or triple and people would still purchase gas, because they rely on it so heavily for transportation.
International and National Prices can’t be Controlled
The US gets a large portion of its oil from overseas, but it also pumps a fair share itself. Unfortunately, for reasons out of our control, prices are subject to rise both internationally and nationally. Internationally, we are forced to pay the same price as everyone else. America purchases a significant percentage of its oil from the Middle East, where we obviously cannot get a discounted price.
On our own soil, we simply do not have the capacity to gracefully handle the amount of fuel we pumps. There is limited pipeline capacity stateside, which has forced local oil producers to use trains and barges, which is estimated to raise prices by $17 a barrel. Neither of these issues is easy to fix, so the price of oil continues to rise.
Middle Eastern Uncertainty
As mentioned earlier, the US gets a large portion of its oil from the Middle East. Unfortunately, in the midst of a seemingly endless series of conflicts, wars, and weapons concerns in the region, there’s no certainty that America can continue to rely on Middle Eastern countries for oil. In fact, the United States has imposed strict economic sanctions on Iran, meaning that we no longer purchase oil from one of the top petrol-producing nations. As a result, local gas companies are trying to prepare for the uncertainty of the future, by either stockpiling resources, or charging more now to make up for any future fiscal issues that arise. Any political violence or uprising in a Middle Eastern country could do serious damage to the oil economy, which has forced the prices to rise in advance.
These are just some of the reasons that the price of oil continues to rise. Changes to these issues could result in a significant drop in the price of oil, or, frighteningly enough, another significant rise.
This article was written by Richard Craft, an MBA student who hopes to help you understand the economy better. He recommends taking a look at Dragon Products if you’re looking to perform your own oil drilling projects. Check out their website today and see how they can help you!