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Few inputs impact the U.S. economy as much as the price of oil. Oil powers the cars, trucks, and airplanes that transport people and products for the entire economy. As oil prices rise, costs go up for transportation companies such as airlines and freight delivery companies, squeezing their profit margins. Downstream of these companies, customers who rely on them to get products to market are similarly impacted by higher prices. In contrast, most companies in the energy business benefit from higher oil prices, either from higher revenues for oil, or because of increased demand for substitute energy sources such as ethanol and clean energy. Car companies with fuel conservation technology -- such as hybrid engines -- can expect sales to go up as consumers feel the pinch of higher prices at the pump, while those who rely on sales of SUVs may find their business models challenged.
[edit] Who Benefits from Rising Oil Prices
[edit] Who Loses from Rising Oil PricesRising oil prices pose challenges for many companies as well as US consumers, which is why rising oil prices are often seen as damaging to the economy.
[edit] Oil Trading Price Updates
[edit] Why Oil Prices Rise or Fall[edit] Demand GrowthDemand for oil, as well as demand for energy in general, is closely tied to the global economic cycle. In periods of economic growth, new factories consume energy, shipping companies transport more goods and consumers purchase more automobiles and take more plane trips. This demand for energy -- or even news suggesting the economy is heating up -- pushes up energy prices. For example, a recent announcement that five major central banks will pump money into the world economy to help mitigate the current credit squeeze caused the price of oil to jump over $4 at speculation that energy demand would increase. Conversely, during periods of economic contraction such as recessions, demand for oil and other types of energy tends to fall, leading to reductions in price. Rising oil prices can force major purchasers of oil to turn to other fuel types. The U.S. Military, for example, in May of 2008 tested a jet that broke the sound barrier using synthetic fuel. Since the military is the largest single consumer of oil in the U.S., at 1.5% the country's total, and rising oil prices drove the Defense Department's energy bill up 25% in the last year. Since estimates state that commercial-scale synthetic-fuel refineries could sell the fuel at just $55 a barrel, the military is now pushing away from oil - which could actually drive oil prices down.[7] Even regular consumers are turned off by soaring fuel prices, turning to gas-efficient cars or simply driving less; gasoline demand in the U.S. for the first five months of 2008 has been 70,000 barrels per day lower than in the first five months of 2007.[8] Even U.S. consumers are starting to change their driving habits; gasoline demand at the beginning of June 2008 fell 3.8% from the year before; consumption fell 1.9%.[9] [edit] Supply ShocksOil's supply can be disrupted in a number of ways, driving prices up as a result. Cartels such as OPEC periodically decide to pump less oil out of the ground in an effort to raise prices and increase revenues for countries that export oil. Additionally, oil supply can be impacted by terrorist attacks or other disruptions to the transportation and refining networks -- including pipelines, shipping facilities, and refineries -- that bring oil from where it is extracted to the consumer. Strong hurricane seasons can damage oil platforms in the gulf, reducing the amount of oil supplied to the U.S. Supply can also be artificially reduced or increased by government taxes or subsidies on oil production. The recently passed U.S. Energy Bill, for example, was expected to cut tax breaks for big oil companies, thereby sending oil prices through the roof; because of the industry's lobbying efforts, however, the bill did not contain the taxes that were expected, so oil prices stayed relatively stable. The 2005 Energy Bill expanded the U.S. Strategic Petroleum Reserves to nearly 1 billion barrels; a reduction in the the size of these reserves also can cause oil prices to spike. On June 16th, 2008, Saudi Arabia committed to increasing production to a record 9.7 MMBPD, in response to riots over rising fuel costs from South Korea to Spain. Increased production is expected to bring prices down, though OPEC still believes that rising fuel prices are not a function of supply and demand, but a function of Western government policy and rampant speculation.[10] On June 20th, China announced that it raised diesel prices by 18% and gasoline prices by 16%; oil prices on world futures markets immediately fell by $4, as higher prices in China will lead to decreased world demand.[11] [edit] Peak Oil and Declining ProductionPeak oil theory also presents an idea of how oil's supply will decline; since oil is a limited resource, eventually half the world's reserves will be used up. As reserve extraction approaches this halfway point, production increases, and at the halfway point, prices are lowest and production volumes are highest. Once the halfway point has been passed, production begins to fall and prices begin to rise. Many analysts believe oil production is at or past peak oil already, since price are now at record highs and production volumes are slowing; world production fell 0.5% between 4Q07 and 1Q08 and U.S. production fell 2% during the same period, indicating that mature regions like the U.S. are declining in productivity faster than the world on average - but world production is still declining. OPEC production is also thought to be declining; satellite photos of Saudi Arabian oilfields show more presure-pumping (an expensive way to get oil out of the bottom of a maturing well) occurring in the last year, indicating that the country is working much harder to keep production up.[12] U.S. Department of Energy data released in May 2008 also shows that, in spite of a 57% increase in prices in 2007, the amount of oil exported by the world's top exporters fell 2.5%. Demand for oil in the world's six largest exporters (Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar) increased by more than 300,000 barrels, while their exports fell by over half a million barrels.[13] [edit] Currency FluctuationsThe United States imports much of its oil, and that oil is purchased abroad in U.S. dollars. The changing value of the dollar in comparison to other currencies impacts the price paid by end users. A strong dollar means a lower price, in dollars, and a weak dollar means more dollars must be spent to purchase the same amount of oil. Currency fluctuations are complex (for a more complete discussion see currency fluctuations) but the value of a currency is impacted by the relative value of goods imported and exported (known as the trade balance), interest rates, the size of the national debt, and the state of a nation's economy. As the U.S. economy sinks further into recession, the U.S. currency continues to depreciate, causing the recession to compound the rise in oil prices. Though loans from the Fed are currently keeping the markets afloat, if these loans stop, many analysts predict the markets will crash and oil will go through the roof. [edit] SpeculationSome analysts believe that oil prices have been spiking recently because of increased speculation about the future value of oil. Specifically, these analysts claim that the belief that oil supply is lower than it is and belief that future oil supply will be just as low has led traders to inflate oil prices in the present. While much of the data shows that production has been slowing, it's likely that speculation could account for some of the present price spikes. When oil prices closed at record highs for five days in a row during the week of May 5th, 2008, a House of Representatives committee announced an investigation regarding the role of hedge funds and investment banks in pushing up prices. In June 2008, the U.S. commodities futures regulator announced new rules requiring daily large trader reports, and position and accountability limits for foreign crude contracts traded in the U.S.[14] [edit] Instability in Oil Producing CountriesSecurity issues with countries such as Iran and Iraq, have led to a dramatic increase in the prices of oil. After surging nearly $5 on 26th March, light, sweet crude for May delivery rose as much as $2.05 to $107.95 a barrel on the New York Mercantile Exchange yesterday (Thursday, 27th March 2008) as concerns about violence in Iraq compounded the effect of supply concerns. A bomb exploded at the Zubair-1 pipeline in Basra, which transports crude to export terminals at the Persian Gulf, Wednesday. Basra is the third largest city in Iraq, and has been the staging ground of several clashes between Iraqi forces and militants loyal to Muslim cleric Moqtada al-Sadr. Iraq’s average production in the month of February was 2.4 million barrels per day. Basra Rumaila South and North oil fields produce approximately 1.3 million barrels per day. The city is also the site of one of Iraq’s largest refineries, the Shuaiba refinery that has been operating at a capacity of 100,000 barrels a day, short of its full capacity. An average of 1.54 million barrels of oil day flow through the city of Basra each day. The recent spate of violence has cast serious doubts about security in the region and sent the price of crude soaring. "The market will get significantly tighter if the roughly 2 million barrels a day we get from southern Iraq is taken offline," Rick Mueller, director of oil practice at Energy Security Analysis Inc. told Bloomberg.[15] [edit] NotesMany who believe soaring oil prices are the result of currency fluctuations or market speculation also believe that the current oil market is a "bubble", and that events like decreases in oil demand in certain countries or the strengthening of the U.S. dollar will call oil prices to crash. The truth in this remains to be seen.   [edit] Ways To Invest in OilStock investors can buy or short-sell oil-related ETFs. One of the most traded ETFs is USO. Also consider DCR, UCR and DUG.
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