GLOBAL PRICING
The price of oil is established by thousands of transactions taking place simultaneously all over the world. The daily price of a barrel takes regional supply and demand into account, as well as market conditions at all stages of production and distribution. A decrease in the price of a barrel on the world market does not necessarily translate to a decrease in the price at the pump.

Up until recently, there was enough spare capacity found in oil reserves to compensate for periods of political and social instability in oil-producing nations. In the past, when there was a shortage in global supply, oil giants like Saudi Arabia were able to up their production to maintain stable levels of oil production. Today, world oil production is close to capacity. Today’s spare capacity is estimated at 2 million barrels per day –- less than 3% of demand. Now, interruptions in oil production are increasingly reflected in oil prices.

Instability of Market Prices
With unstable regimes being the great majority of oil-producing nations, geopolitics can directly affect oil markets and prices.

• Two-thirds of all Saudi oil goes through one processing plant and two terminals. One of these terminals was the target of an unsuccessful Saudi Islamic attack in mid-2002. If successful, oil supplies would have plummeted and oil prices would have skyrocketed.
  
• Analysts and oil experts blame current high prices on instability overseas including:violence in the Niger Delta which has cut production by 500,000 barrels a day, or 20% of the country’s usual total output since 2006.
  
• Violence in Iraq has resulted in a production rate half of the 2.,5 million barrels a day before the war.

Price of Oil on the Rise
The world is currently pumping at near-full capacity. Barring a sizable increase in supplies, any additional increases in demand will significantly raise prices. With consumers like the United States not curbing oil-use and new consumers like China and India emerging, demand and prices will most likely continue to rise.

The world currently consumes over 85 million barrels of oil a day. In 2004, worldwide oil consumption increased by 3.4 % –- up from the 1-2% average increase. Nearly a third of that growth is attributed to China’s 16% jump in oil consumption. Heightened demand, geopolitical influences, the oil industry’s difficulty to keep up with demand, and dwindling supplies has led to skyrocketing oil prices.

• In just six years, the cost of a barrel of oil jumped from just over $28 in 2000 to over $70.

Long-lasting high oil prices are particularly problematic for oil-importing countries. Oil-dependent nations like the U.S. will continue to pay high prices to import oil from abroad. During 1975-2003, the United States sent $2.2 trillion dollars (in 2000 dollars) abroad for net oil imports. Spending so much money on oil may result in stagflation (a period of low growth and high inflation), an obvious risk to economic stability.

So, who profits from the current oil market? Visit Who Is Profiting?