When Will Oil Prices Stop Rising? Watch the Dollar
Oil prices, which are setting fresh records nearly every day, are likely to keep climbing until the weak US dollar starts recovering and more supplies become available.
US light, sweet crude, which has jumped to nearly $120 a barrel, is now expected to rise to $125 barrel and beyond. That's more than double what oil cost just a year ago.
Oh, and expect to keep paying more at the pump as well. AAA reported Tuesday that retail gasoline prices had hit a national average of $3.51 a gallon, another record.
Strong world demand and OPEC's refusal to boost output still play a role in the price runnup. But the main culprits are the weak US dollar—which makes buying oil cheaper for those with foreign currencies—and rampant speculation by hedge funds and other investors.
Market pros think that until the Federal Reserve stops cutting interest rates—which makes the dollar less attractive to investors—oil will just keep rising. And it won't be a smooth ride.
"We're going to see wild swings in pricing, we're going to see a large amount of economic dislocation," said Byron King, an oil analyst who edits the "Outstanding Investments" trade paper. "It's not a happy scenario going on."
The Fed has signaled that it may be done cutting rates soon. Many think the central bank will trim rates another quarter point, to 2%, at its meeting next week and then stop.
That should provide at least some relief against oil prices. Most analysts think that a reasonable price for crude is closer to $85 a barrel if you strip out speculation and the weak dollar. Estimates vary, but some think prices may begin to ease after the peak of the summer driving season and continuing into the winter.
"We have to see appreciation on the dollar before we see any depreciation in crude oil," Stephen Schork, editor of the Schork Report, said on CNBC. "The solution is high prices are the best cure for high prices. The problem is we haven't gotten to that point because no one believed the high prices were going to stick around."
Oil's price is still supported somewhat by fundamentals—primarily hot demand from emerging markets like the so-called BRIC countries of Brazil, Russia, India and China that likely will only get stronger. As those countries develop further, their energy demands will only escalate, meaning still higher oil.
"China and India and the BRIC countries are using the hell out of oil, and that's holding it up pretty nicely," said Mitch Reiner, an analyst at Capital Investment Advisors in Atlanta. "We're still in a commodities cycle here."
Commodities across the board have skyrocketed over the past eight months or so as the Fed has adopted an aggressive interest rate-cutting policy in hopes of staving off a recession. Lower interest rates cause the dollar to decrease in value, making all dollar-denominated commodities—not just oil—more attractive to investors with more valuable foreign currency.
The spike in price already has resulted in some demand drop, though not enough yet to ratchet the price lower. But once the dollar strengthens and and some other oil supply projects come on line, the equation will change.
"There's plenty of oil. OPEC is playing a waiting game," said Paul Coomes, an economics professor at the University of Louisville. "They're seeing how long they can push it without knocking the economy into a recession. So far it's working for them.
"The longer the price stays up, the more you're going to find Alaska, Wyoming, North Sea Gulf Oil, other places around the world come forward with large supplies. Then the price will drop like a rock."
In the absence of a serious drop in world demand, addressing supply and conservation remain the only viable alternatives.
"If I were advising the policy makers in the world, I would say invest in every energy-producing, energy-saving project you can get your hands on," King said. "Tighten the belt everywhere until it hurts like hell. If you don't it's going to hurt worse when supply doesn't catch up with demand and those prices really start to go parabolic."