« YOU DECIDE: Will North Carolina do better in the recession? | Main | Kannapolis institute director named»

ECONOMIC PERSPECTIVE: Is there an end in sight to rising oil prices?

May 12, 2008

First, it was $19 a barrel, then $100 a barrel, and now $115 a barrel. There seems to be no end in sight to the rising oil prices. It's hard to believe oil prices have risen so far, so fast just because more people in the world are driving cars. What's going on with these crazy oil prices? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, of course, oil prices have been rising all this decade, and the main reason is greater demand, greater usage by people in the world, particularly in developing countries. But you're absolutely right, recently in the last 3, 4 or 5 months, they seem to have taken a big zip upward. And something else has to be going on, and I think that something else is really our government's effort to fight the recession. And let me explain. One of the things that has been done to reduce the adverse consequences of a recession is that the Federal Reserve, the central bank of the U.S., has been lowering interest rates. Now, this has done two things. First of all, it has reduced the interest rates that people earn on safe investments like Treasury Securities and CDs. Also, it has sparked fear of future inflation. And so many investors have been looking for relatively safe - in their minds - and inflation-proof investments, and of course land and housing are out because those markets are in disarray, so they've been turning to commodities. It's one reason why you see gold prices going up - metals prices going up - and also oil. So it's really the investors who have been pouring money into oil prices - oil commodities - that have been pushing up those prices. Now, one perhaps light at the end of the tunnel is that when the Fed is finished lowering interest rates - and many economists think that will come soon - we may see a big drop in oil prices as investors then move out of those commodities, perhaps, back to the stock market, back to CDs and back to Treasury Securities. So I do think there is an end in sight. It's not next week, but it may be in 6 months."

Posted by Dave at May 12, 2008 08:00 AM