Despite Relatively Low Demand, Oil Prices Spike

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The price of oil this week has been hovering around $70 a barrel, down from last week but twice what it was just three months ago.

AAA says the average price of gasoline around the country is now $2.69 a gallon, up 36 cents a gallon just in the past month. But there is something strange about these price increases: Market analysts say the demand for oil is largely unchanged.

Oil As 'Alternative Investment'

The more people use oil, the more the price goes up. When supplies are limited, the price goes up even more. In the oil market, however, the law of supply and demand is just one of the factors affecting the price. For one thing, it is not just the users of oil who buy it; it's also people who play the market.

"This has much more to do with oil seen almost as an alternative investment," says Daniel Yergin, chairman of IHS Cambridge Energy Research Associates.

In part, oil investors figure that even if the demand for oil isn't all that high now, it is likely to grow in coming months.

An anticipated future demand for energy should drive up prices of other energy products, such as natural gas. That has not happened, however.

Market analysts say that is because the anticipated demand for oil is not just about energy needs generally. It is this prospect of oil as an investment that seems to be alluring. Natural gas is not now benefiting from that speculation.

"Natural gas prices are normally locked in a long contract," says Gal Luft, executive director of the Institute for Analysis of Global Security. "The ability to shift natural gas around the world is much more limited. So oil is a very different creature in this respect."

Impact Of Iran's Unrest On Prices

In the past, when prices have fluctuated more directly with actual demand and supply, the prospect of a disruption of oil production as a result of world events has sent prices skyrocketing, at least temporarily. The current unrest in Iran, a major oil producer, would normally have pushed prices up. But oil was rising well before the trouble in Iran, and the events of this week have not pushed it up any faster.

Yergin, author of the Pulitzer Prize-winning book The Prize: The Epic Quest for Oil, Money and Power, points out that oil producers around the world now have spare capacity. If they wanted, he says, they could produce 6 million barrels more a day than they do now.

"That is larger than the exports of Iran, Nigeria and Venezuela combined," he says. "And that at least gives a safety cushion to the oil market in terms of turmoil that might happen, including the kind of turmoil that we see unfolding in Iran."

Value Of The Dollar

As for the future oil price, Yergin says it all depends not just on energy needs, but on the performance of the whole economy or expectations of how it is likely to perform.

"What it's measuring now is not the current state of the world economy, but where people think the world economy will be in six months, or where they hope it will be in six months," he says.

Among the key factors that could determine future oil prices is the value of the dollar.

In recent months, with investors worried about an economic collapse, people have invested in the dollar as a safe haven: That kept the dollar's value up, meaning it bought more oil, so the dollar price of oil went down. But as investors worry about U.S. deficits and inflation, the value of the dollar could go down, and that would drive the price of oil up even more.



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