What accounts for the behavior of the current and expected future prices of petroleum? Supply and demand are among the most valuable concepts in the economist's toolkit, and I believe they are the key to understanding recent and prospective developments in oil markets. For the most part, high oil prices reflect high and growing demand for oil and limited and uncertain supplies.
On the demand side, world oil consumption surged 4 percent in 2004 after rising a solid 2 percent in 2003. The rise in 2004 was much larger than had been expected and was, in fact, the largest yearly increase in a quarter-century.