Causes of Increase in Oil Prices in Last 36 Months - Essay Example

Such circumstances encouraged speculators to adopt measures that would ensure they made sufficient money to meet future demand. Oil traders have started placing premiums on the prices of crude oil on the basis of instability and uncertainty in the Middle East, which has the largest oil reserves in the world. Moreover, the increasing internal disturbances in countries such as Libya, Iraq and Tunisia as well as the potential threats pertaining to disruption of crude oil production and transportation in this region and in Africa, have led to increase in oil prices.

In view of these circumstances, speculators started bidding higher for oil, which again raised prices across the world. Governments of several oil producing countries have not been adopting efficient management practices that have adversely impacted the performance of the oil industry in these countries. For instance, oil producing nations such as Venezuela have been channeling their oil revenues into domestic politicking in order to continue holding on to power. The oil industry in Venezuela and other countries in the Caribbean region have been nationalized and are used by the respective governments to meet their political objectives.

Revenues from the oil industry are used to finance social projects and to subsidize gasoline to citizens. Oil revenues are substantially misappropriated in meeting the costs of political agendas, which reduces oil available in the market and thus there is increase in prices. The PDVSA is the only oil company in Venezuela that is having complete stake in the country’s oil functions. In being owned by the state, its management complies with state mandates irrespective of the fact that the company’s long term revenues and profitability suffer a setback.

These governments try to make more money out of the oil business by quoting oil prices at very high levels. In African countries such as Nigeria, the increasing activities of rebels and terrorists have deterred investors from investing in the oil industry (Flower, 2010). Such circumstances deprive the sector from employing advanced technology because of which high production levels cannot be achieved and the resultant short supply leads to higher prices. Increasing use of industrial and automobile equipments, especially in developing countries, has led to increased demand for oil.

The law of demand and supply provides that the price of any commodity will increase if its demand increases at any given supply level. In view of political and economic circumstances oil producers are not increasing supply of oil adequately in keeping up with increasing demand. It is thus natural that oil prices will increase. In the last few years, the evolving patterns of industrialization and use of vehicles has led to advancement of production processes, which have led to increase in demand for oil.

The global demand for crude oil is increasing steadily, particularly in India and China that are undergoing rapid industrialization and development processes (Gupta, 2005). The economies of China and India are slated to grow the maximum in the coming future and they have already started consuming much higher levels of oil in meeting their energy requirements. Increasing per capita incomes in China and India have considerably increased the demand for automobiles and more and more people now own their own cars (Reynolds, 2005).

In view of the huge middle class in these two countries, which are the most populated countries in the world, it is apparent that the demand for oil will also increase substantially. The US is no longer the biggest oil consumer and cannot dominate the oil industry by demanding preferential oil prices for