Culprits and Tolls of Record High Oil Price

Crude Oil price on the New York Mercantile Exchange spiked to a record high $131 a barrel on May 28, 2008. Within the two month prior to the record high, the oil price soared almost 30%. People are still difficult to digest that the oil price has been twice as expensive a year ago.


Culprits

As the oil prices hit the record high, people are looking for culprits that cause the surge. Many people believe supply and demand are driving the high oil price. As the world economy grows, especially in China, oil consumption follow through, which in turn bring to soaring in the oil prices. Meanwhile the U.S. domestic demand doesn’t show any sign of declining due to lack of substitute for oil.

Speculators and energy traders have been blamed for contributing to the painful run-up in oil prices. It’s true that oil future trading has shot up for the past five years as investors have poured money into oil and other commodities in searching a hedge against inflation and stock market slump. Inevitable, these market forces have driven the prices.

Other reports suggested that a week dollar has play role in the oil debacle. Considering that the dollar depreciation has not been as much as the oil price spike, the exchange rate effect might be moderate.


Tolls

Commuters of the middle and lower middle classes feel most of the pain of this oil price upsurge that is translated to soaring gas at the gas pump stations. Gas prices rose to a new record near $3.99, and are likely to hit $4 a gallon soon. Consumers don’t have other choices but keep pumping their cars with the high price gas. Households have to share the burden, as the expensive oil prices have increased almost of consumer goods.

This oil price run up has shaking businesses hard, especially automotive and airline industries. Automakers witness drastic drop in their sales in the past one year. General Motors decided to close four factories. Airlines feel direct blow of the oil rise; United Airline just said that it would scale back its operation by reducing its fleet. Other business sectors can’t escape from the heat of oil price; they have to pass through the escalated cost of energy to their costumers in order to survive.

This historic surge in oil prices inevitable would worsen U.S. economy that has been suffering from free falling house price and prolong the recession.

Chart: BusinessWeek