The Factors Encouraging High Oil Prices
Sarah Emerson Testimony before The US Senate Committee on Energy and Natural Resources: April 3,2008
SUMMARY: We are witnessing striking developments in the global markets. The price of crude oil has doubled since the beginning of 2007 and is at or above $100 per barrel. The dollar has fallen precipitously and is now worth only about 2/3 of a Euro. Oil exporting countries are pumping "petrodollars" into the global economy. Some estimates put that amount at $4 trillion dollars as of the end of 2007.
This is the status quo, and as shocking as it seems, it appears to be relatively stable. The weak dollar cushions the impact of the high oil price on consumers outside of the U.S., the petrodollars provide liquidity in investment which helps grow the global economy, especially outside of the U.S. And one could argue the Fed’s monetary policy, designed to stimulate our slowing economy by lowering interest rates, keeps the dollar weak, which in turn encourages investors to buy commodities, especially oil, as a hedge against inflation.
But, as we witness these developments in the financial markets, it is important to keep in mind that oil prices could only display this kind of strength because of what has taken place in the physical market for oil.