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Oil Prices Surge Despite Weaker Demand

Weaker U.S. dollar a major price factor

October 13, 2009
Sometimes it's not all supply and demand. In the case of oil prices, crude has zoomed higher in recent days despite weaker demand around the world.

Instead, a weaker U.S. dollar is making oil more expensive and, by extension, proping up gasoline prices.

Oil prices rose above $74 a barrel on the New York Mercantile Exchange in early Tuesday trading. Goldman Sachs reiterated its forecast for crude prices to hit $85 by the end of the year.

Analysts say it won't be demand that pushes prices up. In fact, with the exception of China, petroleum demand is lower in most industrial and developing nations.

But since oil is priced in U.S. dollars, it takes more of them to buy the same amount of oil when the U.S. currency becomes worth less, as it has been doing for several months now.

Eugene Weinberg, head of commodities research at Commerzbank AG in Frankfurt, told Bloomberg News that a stronger stock market and a weaker U.S. dollar could make oil worth $80 a barrel, even though market fundamentals don't appear to support such a dramatic rise.

Since retail gasoline prices are closely associated with oil prices, consumers can expect to see gasoline prices rise as the dollar continues to weaken.

Natural gas to the rescue

But rising oil prices might make another fuel more attractive economically, and this one could be very good for U.S. consumers. Technology advances for extracting natural gas from rock have advanced rapidly, dramatically increasing the amount of supply, according to presentations as last week's World Gas Conference in Brazil.

While the world's proven natural gas reserves have risen to the equivalent of 1.2 trillion barrels of oil, the good new for Americans is that much of these new reserves are in the United States.

Exploration in Texas and Pennsylvania has already brought vast quantities of new gas to the market and, as a result, the U.S. has drastically cut its imports of Liquified Natural Gas. Prices have also come down.

"The common wisdom was that unconventional gas was too difficult, too expensive and too demanding," Rune Bjornson, of Norway's StatoiHydro, told the industry journal Petroleum Economist. "This has changed. If we ever doubted that gas was the fuel of the future - in many ways there's the answer."

According to Bjornson and other industry insiders, the known natural gas reserves provide enough fuel to meet energy needs for at least the next 60 years.

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