Can someone please explain in simple terms why the price of oil keeps increasing?

Also the knock on effect of this.Can someone please explain in simple terms why the price of oil keeps increasing?
Although demand for oil is increasing all the time, the recent rapid rise in the price of oil is not really reflective of this. There are basically two reasons for the rapid increase: speculation, and the declining value of the US dollar.





Speculation can drive the price of anything sky high, out of all proportion to any valid market value. This kind of speculation tends to create what are called ';bubbles,'; a rapidly expanding, but ephemeral, value that eventually bursts like a bubble, causing the price of the commodity to return to more reasonable levels. This can be seen in everything from the recent housing bubble to the European tulip bulb mania of the 17th Century, when prices on tulip bulbs went through the roof based on rampant speculation (no, I'm not making this up).





The second reason for the price rise, the decline in the value of the US dollar, is the result of the fact that oil is traded on the international market using dollars as the medium of exchange. When the value of the dollar declines, that means it has less purchasing power, so the price of everything bought with dollars goes up, even if supply and demand remain the same.





These two factors account for the vast majority of the price increase. Eventually, this bubble, too, will burst, and oil prices will decline to a more reasonable level. Unfortunately, it's probably going to get worse before it gets better, and even when the price does go back down, it still could very well be in the $80 range.Can someone please explain in simple terms why the price of oil keeps increasing?
Speculators.





These are people (some times organisations) who 'gamble' on what items will be in demand.


They 'buy' up the future resources and then control the release.





Many businesses do this at all sorts of levels, for example if a supermarket does a 'deal' with a farmer to take his crop of potatoes at a certain price there is an element of speculation involved. Before they make the deal both parties will look at what other factors might have an effect.


In this example this would include expected rainfall/crop yield on a world wide basis. Expected demand and ease of harvesting and distribution.





In the case of oil the speculators get involved at all levels from exploration, through extraction and refinement etc.





They have realised (a long time ago) that oil is the key to the development of many countries trying to combat absolute poverty through technological advancement.


These people and organisations control fast amounts of wealth and look forward and either do deals or provide the finance to do the deals.


Can it all go wrong? Certainly two years ago oil was only about $25 a barrel which was about a third of its value in the oil crisis in the 70's





As for knock on effects our modern world depends upon rapid travel and transport (tourism and movement of goods)


all of which are driven by engines using oil.


So everything you use or buy or do requires the use of fossil fuels, the most 'powerful' of which is oil.


The speculation is around the sense of panic created by the environmental lobby that keeps on about finite resources and climate change, both of which are 'trueisms' but neither of which are understood in absolute terms.


This is what creates the uncertainty that the speculators are exploiting.





Which basically means you have to look at how you have been living your life and start to think what is really important and adjust your spending accordingly.





For many that means don't borrow (even if you could get someone to lend it to you) and have less material possessions and shorter holidays.





Now compare that to the starving millions being beaten up in Zimbabwe and ask yourself do we really have a problem or are we just guilty of over indulgence?





And yes I aslo fall into the guilty bracket.
There are a lot of factors, no one reason. It depends who you talk to.





But basically, increasing worldwide demand for oil, a diminishing non-sustainable resource and global instability.





We are very dependent on oil for almost everything, most worryingly food, as farm machinery, transportation and even packaging all require oil.
It's partially due to the instability in the Middle East but a large part of the price increases is due to speculation. In a way, it's like the housing market. People kept paying increasingly ridiculous prices for houses until they could no longer afford them. The housing market tanked and prices are now going down. It was a bubble and it looks like the rising oil prices are also a bubble which will burst at some point in the future. The prices will go down but I don't believe they will ever go down to the levels they were in 1999 and 2000. They might go down a dollar or a dollar and a half but I don't expect any more than that. After all, the prices never went back down to the levels they were before the late 1970s oil embargo.
OPEC states how many barrels each oil platform can pump each day. Platforms cannot exceed this limit as it will then push the price of oil down.





The following things affect oil prices:-


The American 'Driving Season'.


Oil pipelines being attacked (happens *a lot*).


Tanker strikes.





As soon as output is reduced, prices shoot up, people think petrol stations are going to run dry so they drive out to the petrol stations and panic buy, causing the prices to be increased even more.





Also, the oil reserves are slowly drying up so we need to go further and further afield for stocks. This costs more, hence higher oil prices.
Speculation. People on this post that have said ';due to diminishing supply';, and or ';War with the Middle East'; are in essence or only partly wrong.





There is enough oil to last for the next 200 years, humans are only tapping 30% as of now--so yes there are limited supplies currently in markets. Speculation has driven the economic cycle of supply and demand through the roof. But as with all economics the laws will kick in place, economic laws that is. When total aggregate market demand for an item is in-elastic (in-elastic: price does not control quantity supplied), then the supply can fluctuate without check. I agree you will never see $2.50 or $3.00 gas again, but this does not mean it is a bad thing due to inflation. Consumers will end up having income increased eventually to offset higher prices. Luckily our inflation is pretty much nothing compared to Argentina or South American countries. Inflation there is daily and drastic, or at least was but can be given the right circumstances. You are paying only $.50 more than you did two years ago. Which equates to roughly $7 extra per tank of gas on a 14 gallon gas tank. What is $7, nothing compared to what you spend on items you really do not need. Cigarettes, lotto, designer clothes, Starbucks, etc....... Even if you only make minimum wage you are only out 1.5 h of salary, or you could work 1.5 hours more a week to offset the price of gas.
High fuel prices and food prices are the US indirectly offloading its post-war deficits on the rest of the World.





We're actually paying to let them steal Iraq's oil and thus inevitably from us as well.





This is the price of globalisation and the purpose of American promotion of democracy across the World.





Boycott America, Americans and American goods. Its the right thing to do.
Half of our money paid at pump goes to Wall Street speculators. And we can not hear or read main media reporting them. We are kept in the dark





“Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.”





http://www.marketwatch.com/news/story/ga…
I just watched CNN’s international Channel(3pm EST), breaking the news that oil price spikes again. But the anchor and the reporter assert it is China’s diesel demand contributed to the hike.





Waited a sec ! It is already THIRD time I am hearing CNN’s assertion of China’s diesel demand. The first time was about two weeks ago. What’s going on?





Then, Israel’s-Iran-attack-drill news flashing back-------Which Was Just Happened This Morning ! That “unmistakable signal” is surely an act to have a consequence of oil supply disruption ! Why is it not reported as a oil spiking cause ? !





Time to scapegoat China again before a major offensive ? To verify, I went to CNN web site , there it is :





China hikes fuel prices http://money.cnn.com/2008/06/20/news/int…





China to raise energy prices


http://money.cnn.com/2008/06/19/news/int…





But nowhere saying that Israel’s-Iran-attack-drill will unstablize the oil supply region, causing the oil price up.





For Israelis Iran Strike Drill see


http://www.jpost.com/servlet/Satellite?c…
People invest in what are termed 'Futures'.


They try to predict which commodities will increase in price in the near future.


At the moment they are actually betting on what the price of a barrel of oil will be in the future.


It is in their interest to force up the price of oil to as high a price as they can get.


The link below explains it a lot better.


This refers to the Canadian market but is the basis all around the world.





'U.S. regulator the CFTC, under pressure from lawmakers, has announced a task force to explore commodity activity. It also announced a deal this week with its British counterpart to limit trading on oil futures on London's ICE exchange'
It is bcaz it increases the governments income. it is a government's source of income like income tax. keeps a check on the consumption of oil as oil presently by survey will vanish in a say about 70 yrs time.
I believe that when all is said and done about these gas prices we are going to find that there was a small group of controlling people who caused these gas hikes. It just seems to me that these ';all of a sudden'; escalating prices were a controlled event.
The less we are willing to drill for it the more speculators know there will be less of it and the higher the futures contracts get bid up because they are assured of more of a shortage in the future.
Lol. Because oil won't be the mainstream fuel for much longer, and the money behind the oil enterprises want to get as much bang for their buck as possible
Greed and every other reason posted here.
because we keep buying it! If we stopped buying - the price would fall greatly.
because we are in war with the people who are giving it to us.
Because someone needs to balance the books of war... and WE KEEP PAYING FOR IT.
coz we won the war.
There is less to go round the more we use it ?