Why Don't We Know Why Oil Prices Are So High?

The price of oil keeps hitting new highs, but is it the fault of oil speculators, as some in Congress claim? Or is that an oversimplification?

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STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. Good morning. I'm Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

Oil and water in the world marketplace - both are in short supply. In this part of the program we'll hear about a proposal by those with less water to tap into fresh water from the Great Lakes. But first to oil. And Steve, I know you're in the wires there. Where is the oil this morning?

INSKEEP: Oh, we're trading here over $140 per barrel. And just to give one idea of what that means for most of us, the Oil Price Information Service says that we, Americans, are now paying an extra $1 billion per day - an extra billion dollars per day - for gasoline.

MONTAGNE: And of course one of the odder things about tracking this upward trend in oil and gasoline is that no one really can explain why exactly the price is so high, the price of oil. So we've turned to Adam Davidson. Right now he's an economic correspondent at NPR, and he joins us to, well, give us some of the explanations. Right?

ADAM DAVIDSON: Yeah, exactly. The key thing here is we don't know. I find it sort of funny sometimes to see these politicians and TV commentators saying without absolute certainty exactly why oil prices are high. It's speculators, it's a bombing in Nigeria, it's this and that.

But the truth is, we know that those things are factors, but there's absolutely no one who knows exactly how big a factor the different elements of the price are. The more certainty you hear in someone's voice is a pretty sure sign that either they don't know how little they know or they're, you know, trying to sell you something, sell you an idea or something. Because there's so much uncertainty in this field. It is shocking to me how confusing it can be.

MONTAGNE: Well, let's break it down then, those elements as you described them. What about supply and demand?

DAVIDSON: Obviously we know that there's very tight supply; we know there's a lot more demand in China and India. But the thing is, we don't know what supply and demand actually are in oil. I found this really surprising to learn. The U.S. has the best numbers on how much oil we buy and produce and how much we use, and our numbers are not particularly good.

And when you go to any other country on Earth and certainly when you go to developing economies like China and India, we really just don't know how much oil is out there and how much people are using. And OPEC nations have an incentive to frankly lie about how much oil they're producing.

So if you don't have the basic supply and demand data how are you going to figure out where supply meets demand and what an appropriate price would be?

MONTAGNE: And there's a lot of confusion, or at least obfuscation, about speculation.

DAVIDSON: Right. That's the latest boogey - boogeyman. Let's all blame speculators, it's their fault, we finally figured it out. And Congress - many in Congress have picked on this and so have others. Again, no way to know. We don't actually know who is buying and selling oil. We don't know how much of that is speculation. It's not we at NPR; nobody knows.

The CFTC, the government watchdog that looks at this stuff, has begun a lengthy process. They have subpoena power and a whole staff looking into this, and they say it'll be months before the even have the vaguest sense of how much trading is driven by speculation.

Another thing is there's always been speculation. Speculation has positive trends - positive factors and negative factors. But to say speculation is responsible for this much of an increase, that's a level of confidence that the data just doesn't provide.

MONTAGNE: And just very briefly, what about an oil bubble?

DAVIDSON: I really hope we're in an oil bubble. We should all hope we're in an oil bubble if we want the price to fall.

MONTAGNE: So it'll burst, right? That's the idea.

DAVIDSON: So it'll burst. Yeah, because the alternative is, this is the fundamental price, and it's going to stay this way for a very long time. You know, it's a cliche but you never know if you're in a bubble or not. It's hard to know. Frankly, let's hope we are in one.

MONTAGNE: Adam, thanks very much.

DAVIDSON: Thank you, Renee.

MONTAGNE: NPR economics correspondent Adam Davidson.

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