Academic journal article Monthly Labor Review

Surging Oil Prices

Academic journal article Monthly Labor Review

Surging Oil Prices

Article excerpt

As nearly everyone knows, crude oil prices have risen rapidly in the last few years. Early in 2008, they rose to record levels--considerably more than $100 per barrel. Even after adjusting for inflation, the price of a barrel of oil recently surpassed its peak, reached in 1980. After more than two decades of relative stability, oil prices began to increase sharply in 2004, and they have continued their steep ascent ever since. According to the lead article in this issue of the Review (pp. 3-18), the Producer Price Index for crude petroleum increased 51.7 percent in 2007. Although sharp increases in prices for many goods and services can be jarring to consumers, surges in oil prices are particularly disruptive. Rising oil prices have a direct effect on prices for finished energy goods such as gasoline, home heating oil, diesel fuel, and residential electric power. What are the factors leading to the sharp increase in oil prices? Stephen P.A. Brown, Raghav Virmani, and Richard Alm examine this question in "Crude Awakening: Behind the Surge in Oil Prices" (Economic Letter, Federal Reserve Bank of Dallas, May 2008).

Brown and his coauthors argue that much of the recent increase in crude oil prices can be attributed to "the fundamentals of supply and demand." In turn, they examine each of the following factors: increased global demand for oil, the role played by expectations about future oil prices, the weakness of the dollar relative to other world currencies, and concerns about supply disruptions due to political instability in the regions where much of the world's oil supply is located. …

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