Why Is Oil So Dear?

It's not complicated. And the reason isn't Obama. Prepare to be astonished, but as the invaluable James Hamilton explains, it's all to do with world supply and demand. Current global production and consumption run at about 87m barrels a day. If the price had not risen over the past ten years, demand today would be around 100m barrels a day, Hamilton estimates. It took higher prices to hold demand equal to the available supply.

When it comes to global supply, the only country with meaningful short-term discretion is Saudi Arabia. Hamilton starts by quoting the Saudi oil minister...

"There is no rational reason for high oil prices," writes Ali Naimi, Saudi Arabian Minister of Petroleum and Mineral Resources, in today's Financial Times. Well, I can think of one-- if oil prices were lower, the world would want to consume more than is currently being produced.

... and concludes

The question is not whether there is a rational reason for high oil prices, but rather whether there is a rational reason the world is not producing 100 million b/d today. And if anyone knows the answer to that question, it should be Saudi Oil Minister Ali Naimi.

That about sums it up.

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