What is driving up the price of oil?

FACTORS DRIVING up the international price of oil are not that complex, as any Economics 101 student can predict, says FNB’s Lizanne Case. “It all boils down to issues of demand and supply.” Oil is a non-renewable resource and the finite supply is tightly regulated by a select few resourcerich nations. On the other hand, global demand for energy has increased substantially over the years. This has largely been driven by emerging market expansion, especially in China and India. Compounding the situation is subsidies used by almost half the world’s oil consumers, particularly in Asia and the Gulf nations, to keep domestic oil prices lower than global prices. Global oil price increases are therefore not felt evenly across the world. Producers, particularly exporters, in emerging markets such as China can therefore sustain their mounting energy requirements despite increases in the global oil price. Since oil producers are able to fetch a higher price for their exports without experiencing a decrease in demand from these economies, it provides even more incentive for prices to go up. Under mounting global pressure the Chinese government cut fuel subsidies in June, resulting in an almost instantaneous oil price decrease, and many fellow Asian economies are set to follow suit. “However,” concludes Case, “until aggregate demand decreases or supply increases, oil consumers everywhere will continue to be held over the proverbial barrel.”