Sunday, October 28, 2007

Take the Rocks over Oil Prices

The last time OPEC met, Sept 11th, they sought to regain there authority over there market, so they agreed to increase production by 500,000 barrels a day starting November 1st. However, even with the announcement that there was to be an increase in production, prices still rose on the day of the announcement. Since, this meeting oil prices have continued to climb, and there are two very good reasons for this, a weakening dollar, and because OPEC is a cartel. This essay will thus, discuss the reasons behind for the recent surge in oil prices, starting first with the reasons behind the weakening of the U.S. dollar.
The U.S. status in the world economy is being shaken as the value of the dollar continues to fall in the wake of enormous trade deficits and a nationwide housing recession. Recently, the International Monetary Fund Managing Director Rodrigo Rato predicted that there still is room for the dollar to weaken further. "As the IMF looks to a medium-term stability of currencies, we still see that the dollar is overvalued," he said. Other experts have also stated that the dollar could revive if U.S. domestic demand picks up again. However, they are pessimistic, predicting that it will be difficult for the dollar to regain its old glory.
It is clear to see know that the dollar is not likely to rebound anytime soon. But, why should a falling dollar contribute to rising prices? The reason is because world oil prices are quoted in dollars, and with a dollar that continues to weaken compared to a resource that continues to have an ever increasing demand, oil prices will continue to climb.
The second reason oil will continue to climb is because OPEC is a cartel. This oil cartel, which is earning extraordinary profits, will continue to do so because the willingness to pay remains constant and greatly exceeds the cost of production of the oil exporting countries and because they operate as a cartel they are able to charge monopolistic prices.
OPEC plans to meet again in November, but with prices currently at 88 dollars a barrel, it is not a stretch to think that oil prices soon reach 90 to 100 dollars a barrel. OPEC leadership has said that it is worried about the economic conditions in the world market, but they do nothing, and just keep getting richer. Prices could decrease however, if the boost in world production helps balance world supply or at the very least prices could level off, if the dollar was able to stabilize. But, with what the experts have said concerning the dollar and oil futures continuing to rise, it would be wiser to take the Rockies in seven, than to bet on oil prices stabilizing anytime soon.

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