Despite Relatively Low Demand, Oil Prices Spike 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. There is something strange about these price increases: Market analysts say the demand for oil is largely unchanged.
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Despite Relatively Low Demand, Oil Prices Spike

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Despite Relatively Low Demand, Oil Prices Spike

Despite Relatively Low Demand, Oil Prices Spike

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ROBERT SIEGEL, host:

Oil this week is hovering around $70 a barrel. That's twice what it was just three months ago. AAA says the average price of gasoline in the U.S. is also up to $2.69 a gallon. There's something strange about these price increases. Market analysts say the demand for oil is largely unchanged. So why are prices going up? NPR's Tom Gjelten explains.

TOM GJELTEN: The more people use oil, the more the price goes up. And when supplies are limited, the price goes up even more. But in the oil market, the law of supply and demand is just one factor affecting the price. For one thing, it's not just the users of oil who buy it. It's also people who play the market.

Mr. DANIEL YERGIN (Chairman, IHS Cambridge Energy Research): This has much more to do with oil seen almost as an alternative investment.

GJELTEN: Daniel Yergin is chairman of IHS Cambridge Energy Research. In part, oil investors are betting that even if the demand for oil isn't all that high now, it's likely to grow in coming months. But you'd think an anticipated future demand for energy would drive up prices of all energy products - natural gas, for example. That has not happened. Natural gas prices have not kept pace with oil prices.

Market analysts say that's because the anticipated demand for oil is not just about energy needs. Generally, it's this prospect of oil as an investment that seems to be alluring, and natural gas is not now benefiting from that speculation. Gal Luft is executive director of the Institute for Analysis of Global Security.

Mr. GAL LUFT (Executive Director, Institute for Analysis of Global Security): Natural gas prices are normally locked in the long contract. The ability to shift natural gas around the world is much more limited. So oil is a very different creature in this respect.

GJELTEN: Here's another example of how the oil market is functioning on its own these days: 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. Daniel Yergin, whose book is "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 six million barrels a day more than they're currently producing.

Mr. YERGIN: That is larger than the exports of Iran, Nigeria and Venezuela combined. 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.

GJELTEN: 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's likely to perform.

Mr. YERGIN: 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.

GJELTEN: Among the factors that could determine future oil prices is the value of the dollar. In recent months, with investors worried about a global economic collapse, people invested in the dollar as a safe haven. That kept the dollar's value up, so it bought more oil. The dollar price of oil went down. But it's gone back up again as the value of the U.S. dollar started going down. As investors worry about U.S. deficits and inflation, the dollar could sink more. That would drive the price of oil even higher.

Tom Gjelten, NPR News, Washington.

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