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Why is the price in oil rising and who is getting the money?

Name: Arne Englehart
City & State: Akron, Ohio

Question/Comment: Oil has gone up in price per barrel a huge amount during the last few weeks. Neither the cost of producing that oil nor our falling dollar value could have made much of a difference in that short term. Who is getting the money? What economic effect is that creating for the entity/entities getting the money, and what are they doing with all that extra wealth? Thanks for helping me understand what is going on.

Paul Solman: Two questions here, I take it: Why is the price of oil going up as fast as it has been, and who's getting the money and what are they doing with it?

The price of oil reflects several factors:

1) Demand has increased as China, India and other countries have joined the world economy and boomed;

2) Supply has been increasingly uncertain, due mainly to war in the Middle East. Lots of war. And terrorism. And there has been much talk of "peak oil"; decreasing world reserves, that is, because we've hit our peak and the oil that's left in the ground is increasingly expensive to get out and refine;

3) Oil is priced in dollars while the dollar is plummeting, meaning anything priced in dollars (like oil and gold) rises in price.

4) What else are you going to invest in? Stocks? Bonds? Real estate? The more people invest in oil, the higher the price.

5) Speculators have jumped into the market, seeing the huge rises in the price of oil. Must be a good thing, right?

Of course, oil is down almost 10 percent since your e-mail. In other words, speculation is probably a big part of the recent story.

-- Posted April 4, 2008 | Comments (2) | Permalink