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High Oil Prices: The Mystery And The Future

2177 words - 9 pages

I. INTRODUCTIONOil prices have undergone a dramatic change through the history of oil production. Moreover, since the foundation of OPEC the oil prices have taken another form and have been subject to price instability. Nowadays, with the very changing oil price, experts mention different impacts that it may have on economies of countries. Additionally, the high degree of price instability causes major fluctuations in the value of oil of exporting countries and generates dramatic changes to world energy and oil industry. Considering the importance of this economy-shaping issue, this paper will aim to explain this phenomenon including its background, causes and the future of continuously increasing oil prices.II. BACKGROUNDIn order to prove the instability of oil prices we would have to look back at the oil prices through the years. As mentioned in the beginning, after the decision of OPEC in 1973 to set the price of its oil independently, oil prices have began to feel the instability. As a result, "from less than $3 per barrel in the summer of 1973, the price went up to $36 per barrel in January 1981, sliding down to $28 per barrel in 1983, before it collapsed to less than $8 per barrel in the summer of 1986; after which the price of oil climbed steadily to another peak before collapsing again in 1998 to $10 per barrel, but only to sky-rocket once again and peak at $35 per barrel in September 2000, more than 350% in less than 20 months" (Chalabi, 1).Chart 1: The evolution of Oil Prices (taken by Chalabi, 1)As we can see, the decision of OPEC to set the price of its oil has caused dramatic changes throughout time to the oil prices. New estimates, record an oil price increase in the current oil market. Apparently, in August, 2005 the price had been above $60/barrel for over a week and a half. A record price of $75.35 per barrel was reached, due in part to Iran's nuclear crisis, on April 21, 2006. Currently, the price of oil per barrel is around $65 but it is expected to increase more and eventually change.III. CAUSES OF HIGH OIL PRICESThere are many factors that cause oil prices to increase. Additionally, all these factors have together an inter-relation that is the source of high oil prices. Conclusively, oil supply is considered to be the most significant cause for high oil prices. Among other factors, there are: disasters to oil refineries, political crisis in oil supplying countries and increasing activity in the commodities of the market (Mandil, 1).Oil SupplyOn the supply side, the main players in the oil market are OPEC-which currently provides about 40 percent of world supply and holds about 70 percent of reserves-and non-OPEC producers. OPEC, as the largest supplier, is organized as a semi-cartel and aims to maintain excess capacity in order to influence oil prices.There are a number of reasons why oil traders, as OPEC, feel that oil supplies might be reduced. One of the most important is growing conflicts in the Middle East, the world's...

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