WASHINGTON High oil prices are sparking inflation and hitting the wallets of American consumers. Oil is hardly in short supply. Its price is being driven up by factors beyond supply and demand.
Here's a look at what's behind the high prices for oil and its finished product, gasoline.
Question: Is the weaker dollar to blame for high oil prices? Answer:
To some degree, yes. Oil, like many commodities, is sold or traded mostly in dollar contracts. Although oil-producing nations earn dollars, many particularly economies in the Middle East whose currencies also are pegged to the dollar buy most of their imports from Europe, where the euro is the common currency. With the euro at record highs against the dollar, these oil producers are seeing the buying power of their oil earnings reduced. That's why they're demanding more dollars for the same barrel of oil.
Question: What else is driving up oil prices? Answer:
According to the statement from OPEC, the global market is "well-supplied, with current commercial oil stocks standing above their five-year average." Today's prices don't reflect market fundamentals, OPEC said, but the weakness of the dollar, rising inflation and the "significant flow of funds into the commodities market."
Question: Is OPEC blaming speculators for driving up oil prices?
Answer: One man's speculator is another's smart investor. The U.S. stock market has lost about 15 percent of its value this year, but the markets where commodities are traded are surging.
Oil and other commodities now are considered an alternate asset class, and when stocks sag or are volatile, money flows into commodities markets. There, hedge funds and other institutional investors place big bets on what generally are changes in the movement of often small markets.
Question: So supply and demand have nothing to do with today's high oil prices? Answer:
Not exactly. None of this price run-up could be possible without the unbridled consumption of oil in the United States, by far the largest oil user, and the soaring consumption of rising economies such as China and India. Increasing political tensions make shortages a possibility, and markets factor in that risk, which drives prices higher.
Question: Are these rising commodities prices a bubble?
Answer: Could be. If there isn't some underpinning of supply and demand, there's a chance that the steep hike in prices can be met with a drop as steep or steeper. Many analysts have called oil prices a bubble, however, only to watch prices keep marching up.