The recent stupendous rise in the price of crude oil has led economists to propose many different reasons for this phenomenon. The fact that oil is a commodity traded on worldwide markets and used by every country in the world makes it difficult to assess these claims quantitatively and scientifically. This paper proposes seven separate, but interrelated, reasons for the rise in the value of crude oil and evaluates each of these quantitatively using a variety of methods and data sets. These include (1) rising costs and peak oil, (2) rising world demand, (3) increased speculation and spot storage, (4) increased hedging of US dollar assets, (5) greater assertiveness of OPEC and multinational corporations, (6) higher geopolitical risk premiums, and (7) increased additions to global strategic petroleum reserves. It is found that the world has roughly 45 years of oil remaining using Hotelling's Rule to estimate the time to exhaustion of the current known reserves. In addition, it is shown that about 40% of the current high price of oil is due to increased demand, another 10-20% is due to increased geopolitical risk, and the residual 40-50% is due to increased speculation and preemptive storage of oil. It is projected that with oil reserves reaching satisfactory levels, the price of oil should revert back to levels slightly below $100 per barrel during the remainder of 2008 and during 2009.
Tamkang Journal of International Affairs=淡江國際研究 12(2), pp.51-117