Recent actions in the Persian Gulf show once again how susceptible oil prices are to geo-political factors, as the price of oil rose to over $65.00 per barrel this week, in large part over market jitters related to the capture of British sailors by the Iranian Government.

As we reported in Supply Chain Digest, 2006 was a hugely unpredictable year for energy related prices, as the price for a barrel of oil rockets to nearly $80 a barrel in late summer, causing roughly proportionate increases in diesel fuel, and significant increases in raw materials and components with a heavy oil content (see Transportation Management: Diesel Prices Had a Roller Coaster Year in 2006)

However, prices moderated substantially by the end of the year, so that the price of oil was roughly where it started at the beginning of 2006. In fact, oil industry expert Philip Verleger expected prices to tumble much further, saying last September prices could go as low as $15-20.00 per barrel, and to $1.15 per gallon at the retail pump. (See $1.15 a Gallon? Leading Oil Industry Analyst Says Prices Could Plummet.)

It hasn't worked out that way, as many forces have driven prices back up. What's key to understand is that it is often not pure supply and demand that drives prices, but the so-called "futures" market. Many observers believe there is about a $15.00 per barrel premium right now driven by the futures market, which reacts instantly to geo-political and many other factors, versus what the market price would be based purely on supply and demand.