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Reasons for High Oil Prices: Summary from “Oil Price Factors,” April 30, 2008 Talk Given At the Dallas Public Library; Please credit Starks Energy Economics in any use

by Laura Starks, veteran energy analyst

Overall, seven main issues contributed to 2008’s high oil prices:

  1. *Monetary Policy A large percentage of oil’s high price was due to low interest rates and excess money pumped into the US economy for the prior several years, leading to dollar weakness and speculation in all commodities.


  2. *Oil Has No Substitutes A large portion of US energy use, 35-40%, is for transportation. Unlike electricity generation—another major use, along with heating—transportation relies on almost exclusively on petroleum-based fuels. The US is undiversified for all of its transportation fuel, an unbelievable strategic and economic risk . In other words, electricity from West Texas windmills doesn’t lower the price of oil until we have plug-in electric cars.


  3. *Limited Access to Oil Reserves and production are less available than many people realize because most reserves, 65%, are in the hands of the national oil companies (NOCs). The NOCs have different—slower, more political, more long-lived—development incentives than profit-maximizing international oil companies (IOCs). Similarly, in the US 20-40 billion barrels of oil reserves in Alaska, the Eastern Gulf of Mexico, and the East and West Coasts are off-limits. Some of this is being drilled by other countries such as Cuba.


  4. *Government Subsidies Abroad The US has more demand competition than before, particularly from China and India. Many Asian and Middle Eastern countries subsidize petroleum fuels for their citizens, leading to even higher demand. In these countries, demand did not fall when the world oil price increased because consumers weren't paying higher prices.


  5. *Ethanol from Corn Spiked Food Prices Corn-based ethanol was not the perfect gasoline substitute many thought it would be. Food price riots in several countries forced the decision to use corn as food instead of fuel.


  6. *High industrial demand for all fuels stemmed from a strong global economy.

  7. *China substituted oil and residual fuel oil for coal to clean its air ahead of the Olympics, creating even more demand.

Sources: In addition to my own experience, sources include numerous articles and data from Bloomberg.com, Oil and Gas Journal, Oil and Gas Investor, The Wall Street Journal, the Energy Information Administration, and The Dallas Morning News.

For further detail and illustrations, contact Starks at la@lastarksbooks.com or through her publicist, BreakThrough Promotions.

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