Oil Prices

Background:

The price of crude oil, which remains the world’s primary store of energy, has recovered strongly during 2009, following its rapid collapse from an all time high of around $140/barrel in late 2008. Oil is now trading well above its long-term 20-year average: between 1988 and 2008 oil averaged around $33/barrel (in 2007 dollar terms). This increase in the oil price reflects expectations of a fairly sharp recovery in global economic activity, especially in manufacturing and construction, thanks to continued rapid economic growth in emerging economies and powerful financial stimulus in the industrial economies.  

The price of oil is one of the great conundrums of economics, influenced as it is by a very wide range of factors well beyond the simple supply and demand equation which would suggest a much lower oil price. The world consumes around 80 million 42-gallon barrels of oil a day, but despite increasing demand from large emerging economies, demand from the biggest consumers of oil (the U.S. alone accounts for around a quarter of all consumption) is falling as energy efficiency and the availability of alternative energy sources increase. The oil price is influenced by factors such as the fluctuating degree of effectiveness of OPEC (the oil production cartel that accounts for the majority of world supply) as well as by expectations of near-future economic growth, expectations of global conflict, and by supply and demand anomalies as oil reserves held by businesses and governments are run up or down.