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Crude awakening: behind the surge in oil prices

  • Stephen P. A. Brown
  • Raghav Virmani
  • Richard Alm

The first few months of 2008 saw crude oil prices breach one barrier after another. They topped $100 a barrel for the first time on Feb. 19, then rose past $103.76 about two weeks later, surpassing the previous inflation-adjusted peak, established in 1980. In April and early May, oil prices pushed past $110 and then $120 a barrel and beyond. ; These milestones reflect a new era in oil markets. After the tumult of the early 1980s, prices remained relatively tame for two decades - in both real and nominal terms. This long stretch of stability ended in 2004, when oil topped $40 a barrel for the first time, then embarked on a steep climb that continued into this year. ; Modern economies run on oil, so it's important to understand how recent years - with their surging prices - differ from the preceding two decades. A good starting point is strong demand, which has pushed world oil markets close to capacity. New supplies haven't kept up with this demand, fueling expectations that oil markets will remain tight for the foreseeable future. A weakening dollar has put upward pressure on the price of a commodity that trades in the U.S. currency. And because a large share of oil production takes place in politically unstable regions, fears of supply disruptions loom over markets. ; These factors have fed the steady, sometimes swift rise of oil prices in recent years. Their persistence suggests the days of relatively cheap oil are over and the global economy faces a future of high energy prices. How they play out will shape oil markets - and determine prices - for years to come.

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File URL: http://dallasfed.org/assets/documents/research/eclett/2008/el0805.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic Letter.

Volume (Year): 3 (2008)
Issue (Month): may ()
Pages:

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Handle: RePEc:fip:feddel:y:2008:i:may:n:v.3no.5
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