Short-Term Energy Outlook Supplement: Why Are Oil Prices So High?
November 6, 2007
Crude oil prices have increased dramatically in recent years. West Texas Intermediate (WTI) prices, which remained around $20 per barrel during the 1990’s, rose, on average, from about $31 per barrel in 2003 to $57 per barrel in 2005, and to $66 per barrel in 2006. In 2007, WTI crude oil prices have climbed further, to average over $85 per barrel in October, topping $90 per barrel at the end of the month. The EIA believes that the following supply and demand fundamentals are the main drivers behind recent oil price movements:
- Strong world economic growth driving growth in oil use,
- Moderate non-Organization of the Petroleum Exporting Countries (OPEC) supply growth,
- OPEC members’ production decisions,
- Low OPEC spare production capacity,
- Organization for Economic Cooperation and Development (OECD) inventory tightness,
- Worldwide refining bottlenecks, and
- Ongoing geopolitical risks and concerns about supply availability.
Oil markets have been drawing increased interest and participation from investors and financial entities without direct commercial involvement in physical oil markets. The role of these non-commercial futures market participants in recent price developments is difficult to assess, particularly over short time intervals. However, general principles favor a focus on fundamentals rather than consideration of alternative price drivers, when the explanatory power of fundamentals is high. As outlined below, EIA believes that fundamentals provide the primary explanation for the recent trend in oil prices.