Posted: September 4, 2007

Every year since 2003, crude oil prices have hit new highs. Topping out in the mid-$30 range back in 2003, this year spot crude reached almost $80 a barrel during the peak U.S. summer driving season. That’s an increase of over 100% in just four years.

As the 2007-08 winter heating season approaches in the United States, oil prices appear poised for further rises due to low inventories and concerns about extreme weather (both hurricanes and an early winter cold snap).

Experts are worried. A senior official at the International Energy Agency (IEA) in Paris last week told a reporter for London’s Financial Times that oil prices of around $70 a barrel threatened the health of the global economy.

Politicians, pundits and the general public offer differing explanations for why the price of oil has more than doubled in four short years, such as increased war risk premiums and growing speculation by hedge funds. Then there’s the public’s favorite reason, according to opinion surveys, namely: price gouging by oil companies.

Clearly, as long as the cause of rapidly-rising oil prices is in doubt, agreeing on how to meet this challenge will be difficult.

According to veteran energy analysts, the basic cause of rising oil prices isn’t increased war risk premiums, speculation or price gouging. It is old-fashioned supply and demand.

“It’s all fundamentals,” according to Marshall Adkins, energy department head at Raymond James & Associates in Houston, echoing other analysts.

“I think the pictures that some in the media have painted portraying prices as being mostly driven by price gouging, manipulation and profiteering are mostly unfounded and unsubstantiated,” says Kevin Petak, vice president of the energy consulting firm ICF International. According to Petak, “It’s as simple as this: world demand for oil products has been growing robustly, mostly driven by growing economies in Asia. Productive and refining capacity has waned, essentially running in place, and capacity utilization has risen to levels where the markets have become strained.”

Adkins adds, “Hedge fund speculation works both ways (positive and negative) and ultimately nets out at zero.”

In answering questions posed by EnergyTechStocks.com, Adkins also made this important point: while there continues to be “risk premium” built into today’s oil price, it isn’t so much a war risk premium, as it was a few years ago, as it is the premium traders are starting to apply as they realize that the world has little “excess capacity.”

Anyone hoping for relief, at least in the short term, will be disappointed by the IEA official’s remark that the currently unsettled conditions in global financial markets due to the subprime mortgage mess are unlikely to lead to a decline in demand for oil.