Explaining High Oil Prices

By Christian Berthelsen, Wall Street Journal

The U.S. economy is limping along, unemployment is still high, and gasoline demand for this time of year is at its lowest since the 1990s.

So why does a barrel of domestic crude cost around $100?

Oil prices have been on a tear lately, soaring 35% from the beginning of October to their recent peak in mid-November, and have crossed the $100-a-barrel threshold a handful of times. Various causes have been cited, including optimism that Europe's debt crisis would be resolved soon and a tightening supply picture. Fears have also surfaced that global supplies could be disrupted because of geopolitical fallout over Iran's alleged nuclear ambitions.

The big-picture is that despite weakness in the U.S., economic growth and energy demand are strong enough in the rest of the world, particularly in emerging markets.

Growth in demand in emerging markets as a whole is expected to slow from the torrid pace seen in recent years. But forecasts say it will still outpace demand in the U.S. and Europe and will still be strong enough to push oil prices higher. In the major emerging markets that oil investors focus on, such as China, India and Brazil, demand is still expected to grow 4.6% this year and 4.4% in 2012.

Tight global supplies are expected to keep prices high as well, even with the resumption of flows from Libya, where for months the revolution halted prewar exports of 1.6 million barrels a day. As much as one-half of Libya's former oil exports are expected to be restored by year-end, but there is still little slack in the global system.

Rising prices are leading to changes in the direction of flows in the global marketplace for oil products. One big example: Surging foreign demand for fuel products refined from crude—particularly for distillates such as diesel—has turned the U.S. into a net exporter of fuels.