andy
11-08-2007, 05:51 PM
What $100 Oil Means for Your Wallet. (http://www.smartmoney.com/consumer/index.cfm?story=20071108)
http://www.cleanmpg.com/photos/data/501/Oil_Pump_at_twilight.jpgAleksandra Todorovar Smart Money Nov. 8, 2007
WITH OIL PRICES hovering around $100 a barrel, consumers worry about what sort of hit is heading to their wallets.
The 34% jump we've seen in oil prices over the past three months has largely not translated into higher consumer costs at least not yet, says Diane Swonk, chief economist with Mesirow Financial, a Chicago-based financial-services firm. But those days may soon be ending, especially if we get a cold winter that drives up demand for oil. So far, oil refineries and gasoline stations have largely absorbed the increase in crude oil costs in part because demand for gasoline has stayed relatively weak in the U.S. But dropping temperatures and holiday travel could mean those extra costs will be passed along to the consumer.
So what's driving the price of oil? At its core, the good old supply-demand relationship: Oil production is decreasing, while global demand is growing. Last year, world production dropped to 73.5 million barrels a day compared with 73.8 million barrels in 2005. This year's eight-month average is even lower, at 73 million. How come? A primary reason is that the oil-production companies have not invested enough in exploring new oil resources, says Chris Lafakis, associate economist at Moody's Economy.com. Meanwhile, this lesser supply is met with strong demand, driven by surging consumption of oil in Southeast Asia, particularly China.
This is where the speculators come in, explains James Williams, an energy economist with WTRG Economics, an energy research and analysis firm in London, Ark. Much like real estate speculators drove up prices in parts of the country to unsustainable highs during the real estate boom, futures traders are driving up oil prices today. They're buying futures contracts at record-high prices, essentially betting that oil will remain expensive at stipulated future dates http://www.smartmoney.com/consumer/index.cfm?story=20071108
http://www.cleanmpg.com/photos/data/501/Oil_Pump_at_twilight.jpgAleksandra Todorovar Smart Money Nov. 8, 2007
WITH OIL PRICES hovering around $100 a barrel, consumers worry about what sort of hit is heading to their wallets.
The 34% jump we've seen in oil prices over the past three months has largely not translated into higher consumer costs at least not yet, says Diane Swonk, chief economist with Mesirow Financial, a Chicago-based financial-services firm. But those days may soon be ending, especially if we get a cold winter that drives up demand for oil. So far, oil refineries and gasoline stations have largely absorbed the increase in crude oil costs in part because demand for gasoline has stayed relatively weak in the U.S. But dropping temperatures and holiday travel could mean those extra costs will be passed along to the consumer.
So what's driving the price of oil? At its core, the good old supply-demand relationship: Oil production is decreasing, while global demand is growing. Last year, world production dropped to 73.5 million barrels a day compared with 73.8 million barrels in 2005. This year's eight-month average is even lower, at 73 million. How come? A primary reason is that the oil-production companies have not invested enough in exploring new oil resources, says Chris Lafakis, associate economist at Moody's Economy.com. Meanwhile, this lesser supply is met with strong demand, driven by surging consumption of oil in Southeast Asia, particularly China.
This is where the speculators come in, explains James Williams, an energy economist with WTRG Economics, an energy research and analysis firm in London, Ark. Much like real estate speculators drove up prices in parts of the country to unsustainable highs during the real estate boom, futures traders are driving up oil prices today. They're buying futures contracts at record-high prices, essentially betting that oil will remain expensive at stipulated future dates http://www.smartmoney.com/consumer/index.cfm?story=20071108