Price of Oil, Gasoline and its Effects

Exxon Mobil, British Petroleum and Chevron Texaco are some of the wealthiest corporations in the world, but the oil business was not always this profitable. In 1986 the markets were oversupplied with oil, and prices were plummeting. In the United States, gasoline was well under $1 a gallon, inexpensive fuel was boosting the economy. In the Middle East, where oil costs as little as $1.50 a barrel to extract, the business was profitable, but here, where costs were higher, the industry claimed it was losing money. George W. Bush senior went to Saudi Arabia to convince King Fahd to slash production and induce other OPEC members to do likewise. OPEC members cut production, creating an artificial shortage for petroleum until prices increased by 50 percent. Oil business became a very lucrative business.

Today the rise in oil prices appears to be driven by speculators betting that tight supplies or outright shortages will push prices even higher, factors such as inflation and increased demand for oil from China and India only accounted for a small part of the price hike. Series of calamities like hurricanes Rita and Katrina, war in Iraq and unrest in Nigeria and Venezuela have curtailed production, causing supply to dip below demand. The production of oil is concentrated in many of the most unstable countries in the world like Iran, Nigeria, Venezuela, Saudi Arabia, if the conditions in those countries improved the production of oil would greatly increase.

The greater demand leads to increase in oil prices. With increased oil prices there is a strong incentive to produce more oil; there is also a powerful incentive to use less. Then as demand decreases and production increases speculators will stop bidding prices up and they will start betting on the downside. At that point, prices will drop, the oil bubble will burst.