Rising oil prices dominate financial market outlook

Last week the benchmark for oil prices, West Texas Intermediate crude, hit a new peak of $135/barrel. This latest rise has been driven by the realisation that the oil demand would continue to outstrip supply for the foreseeable future. We have seen record levels of demand from Asia while global oil production has remained largely static. The important question now is why has oil production not increased to meet the higher demand? Economists always make a clear distinction between short-run and long-run changes in production. They define the short-run as being the time period when at least one factor of production is fixed. While in the longer term there is scope for all factors of production to be varied. The problem with oil production is that it takes a very long time for oil companies to respond to the signal of higher prices and so increase their production. It is true that in time higher prices will make many under-exploited oil fields come back into production. However, this could be many years in the future. In the short term there seems little that the oil companies can do to significantly increase supply. Against this background it seems unlikely that the rise in oil prices will slow down. With some forecasters predicting the prospect of $200/barrel it is a good time to be an oil producer and a bad time to be an oil consumer.