March 9th, 2012
01:48 PM ET

Zakaria: Why oil prices keep rising

Hundreds of you have submitted very thoughtful questions for me through FacebookTwitter and my blog. Over the next few days, I am going to post my text and video responses to some of the most common questions and a few others that caught my eye.

The rising price of oil is the single most serious threat to the global economic recovery, the U.S. economy and President Obama's reelection prospects. Right now, we are beginning to move into a pretty broad-based recovery. Manufacturing is rising for the first time in 25 years. Technology firms are doing very well. Retail is picking up.  The green shoots of the housing recovery are emerging and that's very important because housing has led almost every recovery since World War II. .

But all the while that you have this economic good news, you are beginning to see oil prices rise quite substantially.  They're up about 15 percent over the last few months. And that could put a damper on all this good news. Why is the price of oil rising?

Zakaria: Iran is a "rational actor"

It's happening for one reason, principally and that is geopolitical risk.  There are fears of a war with Iran and  fears that crippling sanctions on Iran would cut down Iranian oil exports almost entirely.

If you look at demand for oil, it's just not that strong.  Much of the world is in slower economic times than before.  In January 2007, oil was $50 a barrel. It's now $110 a barrel. This doesn't make any economic sense unless you factor in geopolitical risk. So for oil prices to decline, there must be some resolution to the tensions with Iran.

But there is a broader problem, which is that there just isn't that much oil on the market and demand is going to begin to rise again as many countries come out of their recessions and into recoveries.

Zakaria: Another war in the Middle East?

There isn't that much of what's called "spare capacity" - the ability to increase production quickly.  The only ones who have it are Saudi Arabia and they are operating at their limits in some ways.

So there are economic fundamentals that explain why oil prices are high - but not why they are so high.  The reason they are so high is really Iran, Iran and Iran.

Post by:
Topics: Economy • Iran • Oil

soundoff (407 Responses)
  1. Jeb

    Fareed has left out the obvious fact that the oil market is the most manipulated market in the world. It is manipulated on the supply side by cartels and its trade is manipulated by speculators who trade the prices up for their own profit while adding zero value. Oil companies are also complicit and manipulate supplies to keep prices at the levels they want (until they get grilled on capitol hill then the prices mysteriously decline for no apparent reason). There are two things that must happen to stabilize oil prices: end dependence on foreign oil and eliminate the incentives to manipulate the supplies and prices for profit.

    March 13, 2012 at 9:56 am | Reply
  2. ClearThinker

    Do you think??
    Oil companies want electric cars?
    Healthcare industry wants healthy people?
    Private prisons want law abiding people?
    War profiteers want peace?
    Banks/Creditors want debt free people?
    Politicians want educated independently free thinking people?

    March 13, 2012 at 10:00 am | Reply
    • Serviceman

      omfg, if i hear another kook talking about big oil squashing their electric cars... Just go to the damn dealership and buy one and sh** the **** up. The rest of your conspiracy theories are just as baseless and absurd. Healthcare intentionally making people sick? Private prisons... You weirdos out there do no understand both the complexities and simplicities of the world. Water doesnt flow downhill to avoid your perceptions, it's simple topology and gravity. And the economy is following the law of supply and demand, not some vast evil scheme to undermine you personally.

      March 13, 2012 at 1:57 pm | Reply
      • ClearThinker

        Calm down Serviceman. Take your meds. By your comments we know you watch FOX News and listen to Rush. My point went way over your head. Seek help, you might be suffering from PTS.

        March 14, 2012 at 7:59 am |
  3. PCL

    Just mention oil prices and look at how many kooks come out of the woodwork. The fact is that we pay the same prices for crude oil as the rest of the world, we import half of what we use and every player in the market (the largest of which are actually governments, not shifty, shady Wall Street "manipulators") has the chance to buy more of it and/or sell less of it when they expect the price to go up and is thus a "speculator". Nothing Obama can do is going to change any of this any time soon; not increasing exploration for expensive US and Canada production (though domestic exploration should be encouraged for other reasons), not cracking down on this "manipulation" phantom-menace. The Iran fear-factor will be built into the price of oil until the present crisis is resolved or the world gets bored of waiting and assumes it will go on indefinitely. Anyway, if Obama wants to do something useful in the mean time he should push to get rid of the stupid EPA mandates for ethanol content, volatility and oxygenation; these do nothing but make certain refiners rich, drive up prices in certain cities and restrict the efficient functioning of the gasoline market. He should also support the House bill mandating that cars be able to run on methanol as well as ethanol; methanol is the one fuel that can be made CHEAPLY from domestic sources. China saves billions by blending it into their fuels (the current wholesale price is under $1.50 per gallon), while we stubbornly refuse to consider it. Using our abundant natural gas to make methanol is a much cheaper way of using our own resources than generating electricity to power $40,000 subcompact cars.

    March 13, 2012 at 10:17 am | Reply
  4. warmonger

    just flatten those arabs and take the damm oil!

    March 13, 2012 at 11:17 am | Reply
  5. Mike

    I didn't read all of the comments, so maybe it has been said, but the reason for the rising prices is only related to one thing: the over-printing of US Federal Reserve Notes. Oil is traded for ounces of gold, and then converted to US dollars. Since the dollar is weak, it takes many dollars to buy an ounce of gold.

    Forget supply demand; forget Iran; forget speculation. The real reason is the linkage between oil:gold:dollars and the price of gas will increase even if Iran becomes friendly like Canada. The price will rise even if China and India stops consuming. The price will rise because right now the dollar is artificially "strong" at the moment. Gas, when compared to gold, is about $.75 priced too low. As soon as the Euro and the Europeans regain some sign of stability we will see this $.75 rise in our gasoline prices.

    Wake up and stop listening to this drivel about Iran, instability, speculators and supply/demand.

    March 13, 2012 at 11:50 am | Reply
  6. Etwas

    I read that gasoline prices are also being inflated by refining costs: several oil companies have coincidentally shut down a number of refineries because they don't use cheap natural gas to crack the oil. Basically to maximize profit, several gasoline refineries are offline.

    March 13, 2012 at 12:43 pm | Reply
    • Mike

      No! The US has excess refining capacity at the moment. The number one export product last year
      (besides dollars and debt)? REFINED PETROLEUM PRIODUCTS... GAS, Diesel, JP4

      March 13, 2012 at 12:46 pm | Reply
      • Mike

        March 13, 2012 at 12:47 pm |
  7. Mars

    Speculation. Speculation. Speculation. Wallstreet (I know, its not traded ON Wallstreet, but the name refers to all large-scale gambling on the necessities of life executed by "investors"). As talk of a recovery grows, the idea that a recovered economy will want more oil grows. And the betting on that growth increases. Those bets drive up the price. How freaking long will we tolerate the rich bleeding us to death? Sheesh.

    March 13, 2012 at 1:36 pm | Reply
  8. Serviceman

    Zakaria is a simple SOB. But, there is something even more simple. Where do people put their money these days? You want to retire, right? So you probably had a good ride on real estate, but that party ended, didn't it? Way back in the 90's you had a good ride on the stock market, right? Good luck with that these days. Oil too, had it's bubble burst a few years back, but everyone can see the fundamentals for oil in the future still reflect that the Chinese and much of the former 3rd world are industrializing at a pace so rapid, it is doubtful we will ever again have enough oil to meet demand. Therefore, if you want your poor little 401k to grow, you probably did like everyone else and put it where the growth is at. And that means money flowing into petroleum speculation. Zakaria, you need to look a little deeper at retirement.

    March 13, 2012 at 1:47 pm | Reply
  9. Oneye

    Oil prices keep rising because there is a Democrat in the White House. They will drop like a stone if a Republican is elected. Therefore, expect them to stay high. There is no free market – the price is rigged by the oil giants. When they yell about Capitalism and Free Markets, it's just propaganda to ward off desperately needed regulation. I haven't seen a whiff of Capitalism since Reagan.

    March 13, 2012 at 2:06 pm | Reply
  10. San Fernando Curt

    Since the U.S. and Israel are doing all the smack talk, trying to goad Iran into a war, wouldn't it be prudent to cool it for awhile. War with Iran is not in best interest of the U.S. We have nothing to fear from Tehran. Israel and its powerful domestic lobby are pushing this war. Let's bail on them. And, yes, the oil price rise is mostly linked to speculation. Duh!

    March 13, 2012 at 7:23 pm | Reply
  11. elitistnot

    I don't care how much people speculate about oil and I don't care about how much they screw around with Iran. maybe 10% of the price of oil is speculation and fear. 15% if you want to stretch it. So, where is all the oil going? All I have to do is look at China and India where the middle class are buying more cars that any other region in the world's history. GM has opened up something like 9 auto plants in Asia in the past couple years alone (that was while they were being bailed out in the US and closing plants in America by the way). Ford has followed suit as well. China is on the verge in less than a decade to surpass the US as the world's largest consumer of oil. India is not far behind. Other parts of Asia are also experiencing great wealth expansion. What does the media (like CNN) think Asia does with great wealth expansion? Buy more bamboo rickshaws? Nope. They buy lots and lots and lots of cars and oil products like plastics.

    March 13, 2012 at 10:15 pm | Reply
    • elitistnot

      Also China and India account for 50% of all the luxury goods consumption in the world. Gucci, Chanel, etc are tripping over themselves to expand into these regions and reap massive rewards. The US alone does no even account for anything close to 50% of the consumption all the world's luxury goods. You want to sell cars, expensive hand bags, jackets, anything really... look to Asia. That is where all your oil is going. China is striking deals with Iran while the US jerks around with them. China is striking deals with Canada while the US jerks around with the pipeline idea. China is striking deals around the world while the US spends, yet another, decade jerking around doing nothing productive.

      March 13, 2012 at 10:24 pm | Reply
  12. John

    Natural Gas is not traded on the open market, electricity is not traded on the open market, water is not traded on the open market. Why is oil traded on the open market? It's because 20 years ago some rich politicians decided they could become richer and BS'd that trading oil would make prices come down. Ya, how's that working out now? We only get 10% of our oil from Syria yet the problems there are making the price of oil skyrocket? BS! Fn BS. Whats making the price of oil skyrocket is oil being traded on the open market where it does not belong.

    March 13, 2012 at 11:41 pm | Reply
  13. David Marriott

    That's an easy one! Canada is our single largest supplier of imported oil into our country and since Obama spent us out of existence with a new $5 trillion recod that he added to the national deficit, U.S. dollars are now worthless than canadian dollars! Mexico is our second largest oil supplier and their Peso has caught up significantly too! The U.S . gets alomost none of its oil from the middle-east! This geopolitical nonsense is a smoke screen for the failed policies of the Obama administration! ...what else would you expect from CNN! ...LOL

    March 14, 2012 at 5:49 am | Reply
  14. krehator

    Because they want more profits. Every other excuse is a smoke screen.

    March 14, 2012 at 7:43 am | Reply
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