Tuesday, June 24, 2008

Oil Price Shoot Up. Who is doing it?

I have been reading several articles regarding oil price shoot up and many people's opinion for the price hike is couple of major financial institutions in USA. I cannot accept this as a whole.

Everyone should understand that this is not the only reason for the oil price shoot up. May be the financial institutions may speculate but it cannot be constant. I believe that the major financial companies are just one of the causes of this price shoot and not the only cause. These price rise were predicted long time back by some of the well known economist (based on general and fundamental ecnomic theory - we need either more supply OR less demand).

Just think off, what if if you have abundant oil (just like 10-15 years back) ?? How it will be possbile for the financial firms to increase the price just like that if you have oil in abundant?? if you have abundant oil all over the places (ie., supply is much much higher than demand), what the best can financial firms do to price hike?? Practically it is impossible. So the basic economic theory is either you should have abundant supply OR you should have lesser demand, when both are not coming well, the world hit. so, the basic economic theory proves that financial institutions just cannot be the only cause for the price hike.

I think everyone will accept that oil supply through out the world is not sufficient. ie., demand for oil is much much higher than its supply. When demand is high and supply is less, it is very obvious that the price will shoot gradually.

Currently, we are buying drinking water (is it just because that water companies are providing clean water?? Just think what if in future if you din;t find much water?? Demand will increase in its own pace, but no supply. Autmatically the price for water will increase to an unexpected level over the period and these financial instituions may be part of it).

I think many knew that the current price rise of Indian rice in local Indian shops at USA. It again acts in a fundamental economic theory. Supply of rice is less, but the demand is high. So, obviously the price goes high (increase in rice price rise starts from local shop keepers and it goes all the way to rice cultivators). Same theory apply for the world's major financial institutions too. They are just like another shop keeper (but in much bigger way).

Look at the US Oil price index for last couple of years. (in 2004 1 Gallon is $1.99, from than on it slowly increased to $4.00 now). Its not an overnight shoot up (ie., the price doesn;t increased from $1.99 to $4.00 over night. The price increased gradually based on supply and demand theory). In India, its slightly different scenario. The Indian Govt., didn;t increase the oil price gradually (the bigges mistake they have done it knowingly) and just because of that the Indian govt., and the common man are suffering now.

To my common sense, either one should happen in the forthcoming years:

  1. Increase in oil supply

  2. Replace oil with some alternative (no just 10% or 20%, but 50% atleast)

  3. Demand for oil has to be reduced

In the above 3 points, the first 2 is not going to happen atleast in the next 10 years. So I believe, demand for oil will grandually decrease and automatically the price will come down. The reason why I feel this ways is, for the comman man, always there will be a limit (sub-consciously) registered in the mind. And it looks like we are almost reaching to that level. How I am concluding this?? Simple. I have started reducing the travel, very consious in spending in oil for past few months. Since I am common man, I hope most of the people will have the same thought and will try to execute same plan (through out the world). So, in the coming future, obvisouly the demand will come down to certain level and the oil price will also come down to certain level. In the mean time, products alternate to oil will slowly capture the market too.

Hope my view points helps!!