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Why prices rise

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Steve Mufson at the Washington Post [2] is bewitched, bothered, and bewildered about why oil prices keep rising. The headline:

Skyrocketing Oil Prices Stump Experts

The article begins:

Confused about oil prices? So are the experts.

Executives from the giant oil companies say it’s partly the fault of
"speculators" or financial players. Key financial players say it’s
really a question of limited supply and expanding global demand. Some
members of Congress accuse the Organization of the Petroleum Exporting Countries [3] for bottling up some of its production capacity. And OPEC blames speculators, wasteful U.S. consumers and feckless U.S. policy.

Almost everyone points at China’s growing appetite for fuel.

Whatever the causes, one of the most dizzying runs in the history of
oil prices picked up pace yesterday — again — as crude oil prices
jumped to settle at more than $133 a barrel, up $4.19 in one day, 18
percent so far this month and more than one-third so far this year.
Prices climbed even higher in late electronic trading.

After a few paragraphs explaining the impacts of the higher prices, the Post quotes an expert who does have a theory:

But the bigger question is: What has been driving the doubling of
prices over the past year even as U.S. demand has stagnated and global
output has continued without any major new disruption?

"The basic story that has brought oil from $20 to $130 dollars is
that world demand is growing robustly when world supply is not," argued
Jeffrey Rubin, chief economist of CIBC World Markets [4].
"As a result, we need ever-higher world oil prices to kill demand in
the [industrialized countries], which is exactly what’s happening."

While U.S. demand has leveled off, Rubin said, demand in China is
growing at a 12 percent rate, more than the 8 percent rate he forecast.
While the extra increase in China is probably because of short-term
factors, such as the earthquake or hoarding by the government in
preparation for the Olympics, Rubin said even the lower rate would keep
world demand growing briskly.

Hmmm. Seems pretty straightforward, doesn’t it? Rubin doesn’t seem stumped. I’m not sure why this article was written. I think the author wants one reason. China. Speculation. Greed. (Or more accurately, an increase in greed.) But the simplest explanation is that world demand is growing briskly and world supply is not as responsive.

If we want low gas prices, we should lower the costs of exploration and refining. If lowering those costs has environmental costs you don’t like, stop complaining and get on your bicycle.

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