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

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