Why Is There An Increase In Current Oil Prices
Michalis 'BIG Mike' Kotzakolios


Defined Tag: Current Oil Prices.

The fact that current oil prices have spiked is no hidden secret. Even if you have not seen it on the news, you probably fill up at the pump every week; and it is here that you can feel the shifts in supply and demand on a regular basis. Unfortunately, many people do not understand the mechanics underpinning the price changes. Rather, they often see it as collusion against the consumers on the part of big oil companies. In contrast, almost all increases in the price of oil can be traced back to a supply shock (a massive contraction in supply) or demand pull (a massive increase in demand).

Oil prices begin with the costs for exploration for oil reserves. Crude oil forms in extremely inaccessible locations, often several miles below the surface of the Earth. These oil reserves must be drilled, and the oil transported to refineries. Refineries distill the crude oil into different fractions, such as unleaded gasoline, diesel, heating oil, and No. 2 fuel oil. Even the residue such as the thick No. 6 fuel oil has a market. Each step in the oil production process increases the oil prices for the end buyer.

Current oil production is centered in the Middle East, although many other countries are also major oil producers. Unrest, political turmoil, and war in the oil producing areas tend to make investors nervous, driving up current oil commodity prices. Oil prices increase when the supply is limited, or even appears that it may become limited. On the other hand, the current oil price can decrease if political conditions are calm and the supply is plentiful. Current prices for oil are even influenced by events in the major world financial markets.

Current oil prices, if they continue to increase, will affect both consumers and businesses in a less than positive way. If the price of crude oil continues to rise, it will increase the cost of diesel, heating oil, and gasoline. This will increase costs for both consumers and businesses, which will touch off a two part effect. The first part of the effect is that consumers will effectively feel their incomes shrink, since they will have to spend more money to buy the same amount of gas. This will make them want to earn higher wages. The second part of the effect is that businesses will have to raise their prices to reflect the increases in costs. This will increase costs for consumers, making them want that increase in wages even more. If the businesses give the increase in wages, they will have to increase prices further, which has the potential to initiate an inflationary spiral.