Many blame Middle East turmoil or a weak dollar for rising oil prices, but they provide only a partial explanation. The chief culprit is speculation in oil markets. Fortunately, it can be stemmed with several regulatory steps.
People around the world are feeling the pain at the pump. President Obama, whose reelection in 2012 may depend on a rebounding American economy, has promised that his energy plan could temper oil prices. Adding to the stakes, minutes from the US Federal Reserve meeting in March 2011 revealed concern that high oil prices could hurt the American economy.
So why have oil prices risen from around $36 dollars per barrel in December 2008 to $110 dollars per barrel now? And what can be done to lower them? Speculation in oil markets, which has little to do with oil demand and supply, is a key part of the problem, and it can be stemmed with several regulatory steps.
Oil prices are determined mainly by the combined behavior of oil traders on markets, the most important one being the New York Mercantile Exchange. When traders believe that oil prices will rise, they buy oil futures in the hope of selling them down the road for a profit. Such buying increases oil prices, and, eventually, the price of gasoline, heating oil, and many other products.
Oil prices started to rise because traders saw clear signs that the US and global economy were rebounding after the Great Recession, creating more demand for oil. The weakening dollar and fears that Middle East turmoil would disrupt oil supplies have also pushed prices higher.
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