Critical Questions: The Volatility in Global Oil Prices
December 7, 2007
Global oil prices have more than tripled since 2003, and volatility has become the rule rather than the exception. Between September and December 2007, future prices for West Texas Intermediate (WTI), a sweet marker crude, ranged from $70 to just under $100 per barrel. Yet in the past two weeks, prices have again receded to below $89 per barrel.
As Congress grapples with passage of another energy bill, market observers postulate a number of theories for explaining why oil prices are so high and offer projections as to where future prices may be headed. Are market fundamentals (supply, demand, refining capacity, inventory levels, etc.) driving the high prices, or is the involvement of an increasing number of speculators, increased capital in energy markets, and geopolitical tension responsible for a so-called security premium? In fact, there are a number of factors at play, each of which at least partially explains the price trajectory of the last few years and the most recent climb (and reduction) in oil prices. Indeed, a combination of noteworthy short- and long-term trends supports current price movements. To begin with, however, one should be careful not to equate the future price for WTI with the average price of crude oil as currently traded on the global market. WTI is indeed a premium marker crude with limited (and decreasing) relevance to the U.S. and world market, but it is generally higher by several dollars a barrel than the average crude price available to refiners, or the average price of the composite Organization of the Petroleum Exporting Countries (OPEC) basket.
