Posted on by John Sloman

A crude story

Oil prices have been rising in recent weeks. At the beginning of October 2010, the spot price of Brent Crude was $80 per barrel. By December it has passed $90 per barrel. There is some way to go before it gets to the levels of mid-2008, when it peaked at over $140 per barrel (only then to fall rapidly as the world slid into recession, bottoming out at around $34 per barrel at the end of 2008).

Higher oil prices are a worry for governments around the world as they threaten higher inflation and put recovery from recession in jeopardy. You will probably have noticed the higher petrol prices at the pumps. If you spend more on petrol, you will have less to spend on other things.

So why have oil prices risen and are they likely to continue rising? The following articles examine the causes of the recent surge and look ahead to the likely response from OPEC and the path of oil prices next year.

Articles
Saudi Arabia to Check Oil Rally in 2011, Merrill’s Blanch Says Bloomberg, Juan Pablo Spinetto (13/12/10)
OPEC Cheating Most Since 2004 as Options Signal Oil Hitting $100 Next Year Bloomberg, Grant Smith and Margot Habiby (13/12/10)
Oil higher after OPEC output rollover; eyes on China Reuters, Christopher Johnson (13/12/10)
Central heating oil price shoots up by 70pc The Telegraph, Harry Wallop (10/12/10)
Speculators driving up price of oil St. Louis Post-Dispatch, Kevin G. Hall (12/12/10)
UK petrol prices reach record high BBC News (10/12/10)

Data
Brent cude oil prices (daily) U.S. Energy Information Administration (use the bar at the top to switch between daily, weekly, monthly and annual prices)
Commodity Prices Index Mundi
OPEC Basket Price and other data OPEC

Questions

  1. Explain why oil prices have been rising. Use a diagram to illustrate your answer.
  2. How can the concepts of price elasticity of demand, income elasticity of demand and price elasticity of supply help to explain the magnitude of oil price movements?
  3. Examine what is likely to happen to oil prices over the coming months. What are likely to be the most important factors in determining the direction and size of the price movements? Distinguish between demand-side and supply-side effects in your answer.
  4. What are ‘crude futures’? Explain how actions in the futures market are likely affect spot prices.
  5. To what extent can OPEC control oil prices?
  6. If crude oil prices go up by x%, would you expect petrol station prices to go up by approximately x%, or by more than or less than x%? Explain.
  7. Why have central heating oil prices risen by around 70% of over the past three months? What are the implications of your answer for the type of market structure in which central heating oil companies are operating?