Oil prices came close to $84 today. The cost per barrel has moved up relentlessly for three weeks. It was only two months ago that light crude priced at just above $70 on the New York Mercantile Exchange.
Oil is not likely to come down, and it is almost certain to go higher. Part of the rise will be “technical” and related to currency fluctuations, particularly the drop in the dollar which now trades at $1.40 to the euro. Four months ago, the exchange rate was well below $1.20.
The other more profound reasons for the increase have to do with old-fashioned supply and demand. Consumption in emerging nations such as China and India continues to rise. US consumption is also steady despite the moribund economy. People still drive and heat their homes. The need for petrochemical products does not seem to have slackened much.
OPEC nations have shown no plans to increase production. Higher prices will help members increase their treasury coffers until crude become so expensive that it chokes whatever life is left in the global economy.
It is a wonder that crude has kept up its price increase. Just yesterday, the IMF said the GDP improvement worldwide will be less than it forecast in April. It expects US growth to be moderate especially compared to its earlier guesses.
Another reason which is priced into crude is a possible disruption in supply. Sanctions against Iran may affect exports from that country. Nigeria’s political climate has begun to deteriorate further. Russia and Venezuela often act against their own economic interests when they use crude as an international policy weapon.
The reason for crude to increase in price multiply every day. Odds are that it will be over $90 by the end of the year, resulting in a host of problems for the world economy.
Douglas A. McIntyre