Mar 11, 2008

Oil prices: how high will they go?

Why are oil prices increasing even when US economy is slowing down? The answer partly lies in market speculation. Following the Fed's interest rate cuts, investors in the market are betting on hard commodities such as crude and gold to assure returns greater than the market average. This is partly contributing to high prices. From the NPR :
"Analysts believe oil's underlying supply and demand fundamentals do not support such high prices, and argue that crude's rise in recent months is mostly due to the falling dollar. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak."
Although widely criticised for not increasing oil production, the OPEC contends that the US economy is to blame for the high oil prices. MSNBC has an article on the OPEC's viewpoint on this issue. NPR also has a somewhat outdated, but good primer on oil prices. It mentions that oil companies are price takers and do not set oil prices per se.

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