Saudi Arabia has again denied President Bush’s request to increase oil production, citing a balance between supply and demand. as the price of oil rose o a new record, over $127 a barrel. In fact the world oil supply, and the American oil supply are sufficient to meet demand. There are no gas lines as we saw during the “Arab Oil Crisis” of 1973. Nobody is suggesting rationing fuel.
The weak dollar and the weak housing market, sparked by the crisis in sub prime home loans have made oil futures an attractive investment, particularly for those who’s money is in dollars. The lower the dollar goes, the higher the price, in dollars, of a barrel of oil. The more money chasing those barrels of oil, the higher the price goes again. The rise in prices attracts even more investment, which again drives the price up, effecting a further drop in the dollar. Even as supplies are increasing, due in part to an increase in production already implemented by Saudi Arabia and as demand is cooling, due to a slowdown in the world’s economy driven by the soft dollar, oil prices continue to rise in an uncontrolled spiral.
Unfortunately this rapid rise in oil prices is not based on solid economic fundamentals. Once again, the last people in to the market are going to be left holding the bag when oil finally drops to a price supportable by supply and demand. How much damage this will do is anybody’s guess, but I would guess big.