What Drives the Price of Oil?

Many factors come into play when it comes to the price of oil.

The cost of extracting oil is one thing that has an impact; another is the law of supply and demand. And then there’s politics.

Marco Werman talks with Michael Klare, professor of Peace and World Security Studies at Hampshire College, about the forces that drive oil prices up and down.

Klare is the author of “The Race for What’s Left: The Global Scramble for the World’s Last Resources”.

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Marco Werman: Arab League member, Saudi Arabia, is in the news and it has nothing to do with the summit in Baghdad. As a major oil exporter, Saudi Arabia’s actions effect the price of gas at the pump, and in case you hadn’t noticed, a gallon of unleaded is pretty expensive these days. Well, this week the Saudi oil minister wrote in the Financial Times that Saudi Arabia will act to lower those prices. Hampshire College professor Michael Klare is the author of The Race for What’s Left: The Global Scramble for the World’s Last Resources. He says there are many factors that contribute to high oil prices right now.

Michael Klare: You know, it’s a supply and demand situation always and what we have is a lot of demand coming from the older industry countries like the US, but also surging demand in China, India and elsewhere and supply just can’t keep pace. And I think that’s gonna be the situation for the indefinite future, but on top of that right now there’s a lot of anxiety about the potential for a conflict in the Middle East, specifically an attack on Iran by either the United States or Israel or both, leading to Iranian retaliation by cutting off the Straits of Hormuz through which something like one third of the world’s tradable oil passes every day. If that were to happen then the price of oil would double or triple, so a lot of speculators are buying up oil now thinking that the price will rise even further, so that adds to the upward mobility of oil prices.

Werman: Well let’s talk about Iran, I mean even without a blockade of the Straits of Hormuz, the economic sanctions for Iran’s nuclear program, it’s said could eventually leave half of Iran’s oil output cutoff from international markets. Is there an unintended consequence here? Trying to stop nukes ends up leading to higher oil prices at US gas pumps?

Klare: There’s certainly no question that that’s the case. Probably Iran’s oil will find markets, but it will be traded in the dark, but that will lead to higher prices as well because it will be traded in a black market.

Werman: Now, when we read that Saudi Arabia can just act to bring down oil prices, it sounds like theres a big question of will around the prices. What are the things that we don’t know that are going on behind the scenes about how oil prices are manipulated?

Klare: I think there’s a certain amount of hype here about what Saudi Arabia could do actually. There was a time when Saudi Arabia had a lot of what’s called spare capacity because they weren’t producing all that they’re capable of producing so that they could increase their output, flood the market and that would bring prices down, or alternatively they could shut down some of their production and that would boost prices. But in fact, most countries now with prices as high as they are, including Saudi Arabia, are producing as much as they can to benefit from high prices. So the notion that Saudi Arabia will act to bring down prices, I don’t really think that’s gonna happen.

Werman: Is there an argument, Michael Klare, to be made that as oil gets more expensive, the more incentives there will be to get more efficient and find alternatives?

Klare: I think that’s going to be the case down the road. What I think we are seeing in this country and I think it’s a hopeful development is that people are buying more fuel efficient vehicles. I don’t think we’re seeing so much investment in new sources of energy. I wish there were, but people are voting when they go to the auto dealership. They’re not buying gas guzzlers the way they once were and that is reducing our demand for oil, and I think that pattern will gain momentum in the years ahead.

Werman: Michael Klare, author of The Race for What’s Left: The Global Scramble for the World’s Last Resources. Thank you very much.

Klare: My pleasure.

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