What drives the oil prices?

Demand The Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency estimate the current world demand for oil at between 86 million to 87 million barrels per day in 2008. When the price of oil rises, this decreases demand in the United States, but demand from growing emerging market economies is expected to increase as these countries industrialize.

Some emerging market economies have fuel subsidies for consumers, and an estimated one-quarter of the world's demand for oil in 2008 comes from nations that have such subsidies. However, subsidies are not always beneficial to a country's economy, because although they tend to spur demand in the country, they may also cause the country's oil producers to sell at a loss. As such, removing subsidies can allow a country to increase oil production, thus increasing supply and lowering prices. In addition, cutting subsidies can decrease any shortage of refined products have been alleviated, since higher oil prices give refineries an incentive to produce products, such as diesel and gasoline.

Supply On the supply side, in 2008, approximately 85 million to 86 million barrels of oil were produced each day. The discovery of new reserves in Brazil in 2007 is a bright spot, but the oil fields in Mexico and the North Sea are experiencing steep declines in production.In OPEC, most countries do not have the ability to pump out much more oil. Saudi Arabia, the one exception, has an estimated spare capacity of 1.5 million barrels of oil per day as of 2008.Nigeria has also become important to the oil market, but the country has a history of instability and rebel attacks, which can severely curtail oil production in this country.

Quality One of the major problems the oil market faces is the lack of high-quality "sweet" crude, the type of oil that many refineries need to meet stringent environmental requirements, particularly in the United States. Much of the high-quality oil imported into the United States comes from Nigeria and surrounding African nations; according to the U.S. Department of Energy, together, Nigeria and Angola exported more oil to the United States than Saudi Arabia in 2007.

Speculation Aside from supply and demand factors, another force driving oil prices has been investors and speculators bidding on oil futures contracts. Many major institutional investors now involved in the oil markets, such as pension and endowment funds, hold commodity-linked investments as part of a long-term asset-allocation strategy. Others, including Wall Street speculators, trade oil futures for very short periods of time to reap quick profits. Some observers attribute wide short-term swings in oil prices to these speculators, while others believe their influence is minimal.

Source: Tony Daltorio