Oil Prices Rise

Jordan Nevares

As turmoil in the Middle East and North Africa continues, oil prices surge and the average price of gas per gallon at the pump in the U.S. nears $4.  Investors are frantically buying oil futures, which has increased oil prices by 20% since unrest began in January.

Much of the conflict now centers on Libya, which is the 18th largest oil producer in the world.  The U.S. imports less than one percent of its total reserves from Libya, however, the rise in oil prices has nothing to do with supply-demand fluctuations.

Saudi Arabia has increased its production of oil to make up for the moderate interruption in supply throughout the Middle East.  The government in Saudi Arabia has problems of its own because of its treatment towards protestors, who are calling for more political freedom and equality. Investors are more confident that Saudi Arabia can meet this goal now that anti-government protests, which started in early March, have cooled down.

Businesses use oil futures as a hedge against rising energy prices. Oil futures can be bought on the New York Mercantile Exchange, and millions of contracts are traded daily.  An oil future allows one to buy units of oil, and sell them at a predetermined price sometime in the future.  If the price of oil rises, as it has since February, the oil future will gain in value.

Turmoil in the Middle East traditionally leads to oil shortage fears, which influences investors to buy up oil futures.  The consumer carries this burden at the pumps where prices have risen dramatically since the outbreak of violence.

Another significant reason that oil prices have risen is the declining value of the dollar.  After massive bailouts, relief packages, and low interest rates set by the Federal Reserve, inflation of the dollar has been at an all-time high.

U.S. consumers are at the mercy of price fluctuations in foreign oil markets because most of our oil is imported.  Americans should expect to see higher gas prices across the country as long as turmoil in the Middle East continues.

On Mar. 30 President Obama announced that he plans to cut 30% of oil imports by 2025.  He also admitted there are no quick fixes to rapid price increases. Consumers should expect to see short term fluctuations in prices with no clear trend as long as the conflict in Libya continues.