Originally Posted by liveforadream

A few things though.

OPEC (organization of petroleum exporting countries) controlled about 40% of the world oil; and virtually all of these oil firms in these countries are state-owned, hence they are not as quick as private firm to respond to the supply and demand but they do. Logically, why would these countries not expand their production to tap on the higher price while other firms do?

If the answer is that they restrict supply to enjoy higher prices, but wouldn't they be cheated out of profit if they restrict the supply and other firms which control about 60% of the supply expand production to enjoy higher price? Also there are always problem with not cheating within the cartel organization.

Many major oil firms beside from OPEC are state-owned, for example in Russia, Bolivia, Vietnam etc. These firms are subjected to many political interventions that a lot of their profits were siphoned to fund political projects instead of investing to drill new oil reserves. The problem is starkly visible in Russian oil industry where the efficiency of their oil firm is stagnant for years. And also equally important, the political unrest in Iraq retarded its industry growth, making it incapable of investing and expanding production. All these constrained on the rise of supply to correct the high price. On the other hand, many developing countries are embarking on tremendous economic growth, especially India and China. As a result, this raises the demand for oil more.

In brief, we have a slow response to market price by the OPEC, the supply constraint on state-owned oil firms and rapid raising demand on developing countries. All these factors contribute to higher oil price.