NCPA - National Center for Policy Analysis

Why Are Oil Prices So High?

March 27, 2000

The price of a barrel of oil has zoomed from $11 to $34 in the past 15 months. That development caught energy experts by surprise and many are now trying to figure out how it happened.

Here are some of the factors experts cite for the price rise:

  • In a badly-timed move, OPEC oil ministers decided to increase crude oil production in November of 1997 -- just as Asia entered its financial crisis and reduced demand.
  • Soon data began to accumulate suggesting that 300 million to 500 million barrels of oil were "missing" -- encouraging traders, convinced that the oil must be around somewhere, to lower prices.
  • Some exporting countries, faced with lower prices, tried to curb production -- an effort which failed due to cheating -- thereby forcing prices even lower.
  • When the lower prices began to pinch OPEC countries' revenues, OPEC and non-OPEC producers alike successfully reduced daily world output by 6.5 percent -- reversing the earlier trend and forcing prices skyward.

Then the winter weather in the Northeastern U.S. went from warm to bitterly cold in January, freezing ports and keeping home heating oil from getting to some distributors. On one day, home-heating-oil shot up to more than $2 a gallon and homeowners saw the cost of filling their tanks for the season jump from $250 to $400.

Suddenly, the issue was politicized in the U.S. Efforts by the Clinton administration to pressure producing countries to raise production may, according to some experts, have backfired.

Which brings us to the present. OPEC oil ministers open meetings today in Vienna, and Washington policy makers are hoping that production ceilings will be lifted.

Source: Steve Liesman and John J. Fialka, "Why Oil Price Tripled Even as Nations Strove to Limit Its Gyrations," Wall Street Journal, March 27, 2000.

 

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