Main Cause of High Oil Prices: Investors?

Question

I always thought supply and demand is the main cause. But when looking at it, oil prices hiked mostly in the past couple years. So unless demand is rising exponentially and supply is decreasing exponentially. I heard from many people investors are the main cause of the oil price hike?

Answer 1

Investors aren't the main cause.  Too many people point fingers at investors as the main cause of expensive gas prices.  They may not be the direct cause but they are a cause.

A bigger cause is demand.  There has been rising demand for gas.  China, India, and developing nations have had more demand for gas/oil.  So that has caused demand to rise and prices to go up.

Also, production/exports of oil has gone down.  So supply has gone down.  In addition, there isn't that much oil out there.  It is finite and will run out maybe in 30, 40 years.  So its supply is not that big.  Therefore, supply (low) has lead to high gas prices-- there isn't much supply.

So the problem is supply-demand.  Not investors (well not MAINLY investors).  Investors are part of the issue but they are not the main problem.

Answer 2

There are many reasons for the rise in oil: Rising demand, shrinking supply and in the short term, speculators. Fortunately speculation is a zero sum game and every time someone makes money, someone else loses it although not necessarily at the same time.

We may be in an oil bubble, speculators buy because they think the price will keep going up and up. One day all those contracts will be liquidated and we will be faced with an unstopable  selling cascade. Oil prices will crash and the gains will be balanced by loses.

BTW, oil supply is still shrinking and demand is growing. In the very long run, oil prices will go up whatever the investors do.

Answer 3

Your question belies a common mistake people make when thinking about supply and prices -- that if there is a shortage that the increase in price will be of the same scale as the size of the shortage.  In a lot of cases that is true, but for products like oil where demand is very inelastic, that isn't the case.

Think of it this way:  Suppose there are 1000000 barrels of oil in the world, and 1000001 people who want a barrel of oil.  Exactly one person is going to have to do without, so the price increases until exactly one person says, "I'd rather go without than pay *that*".

The problem with oil is that every single one of those 1000001 people who want that oil wants *very badly* not to be the one who gets left out.  If every one of those people will pay $1000 rather than be the one who has to go without oil, the price will go up to $1000, even though the world is only short by 0.0001%.  The price is controlled by how much people want it, not how big the deficit is.

Not that investors aren't *part* of the problem, but supply and demand can account for a lot of price change even being just a little bit out of balance.

Answer 4

Investors are only one part of the equation. There are businesses that buy oil futures as a way of shoring up against higher prices later. These are businesses that actually use the oil such as airlines, transport companies and the like. Then there are the folks who buy futures just as a way to make money by speculating on the market. They really don't have any direct use for the futures they buy.

Add to that China and India. Both have economies that are expanding rapidly. Along with an expanding economy comes higher demand for fuel. It's a lot more complicated than that but that is a good bit of the crux of it.

Answer 5

well there has been a large rise in demand for oil recently (with poor countries becoming wealthy and are now having an increasing amount of people who can now get cars where before they could afford it)

and it is also costing more and more money to get oil because the supply of easy to get oil is going down.

but yes investors are a part of the problem I just don't know if they are the main part of the problem.