Friday, July 20, 2007

Why High Oil Prices Are More Sustainable Now

The Economist has an interesting story of why this year's increase in oil prices is likely to prove more sustainable than last year's. Last year, the then peak of $78 per barrel was mainly driven by the fear facto-the fear of a regional war in the Middle East and/or another Katrina-style Hurricane that would disrupt Mexican gulf oil production.

But this year, it is increased underlying demand from primarily China and India which has helped push up oil prices. Another factor -which The Economist does not mention- that makes this year's increase more sustainable is the weak dollar. While the dollar price of oil may be only 3-4% lower than last year's , the oil price in terms of yuans, euros or pounds is still 10% or more below last year's peak.


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