Vicious Circle Fuelled by Oil Price

There has been a lot of hush hush in the newspapers about rising fuel costs and search for alternate fuel sources. Why is fuel becoming expensive? How does it touch each of our lives? We try and analyze the vicious cause-effect cycle driven by the fuel costs.

CAUSE & EFFECTS
Here is a list 9 potential factors which drive the fuel prices up.

1. OPEC Policies : Since mid-eighties Organisation of Petroleum Exporting Countries (OPEC) has been creating an artificial scarcity i.e. it produces only to fill the gap between global oil demand and production by non-OPEC countries. This has resulted in OPEC having a lot of idle capacity and thus a control over the oil prices. But recently with surging oil demands OPEC has hardly any idle capacity left i.e. no safety net and a higher risk premium.
2. Petro-Dollars to Petro-Euros : Till recently almost all oil buying and selling was in US-dollars (petro-dollars) through exchanges in London and New York. But the OPEC countries are now shifting to petro-euros. So till ~ 2002 the USD-Euro conversion rate were independent of the oil price; but now are directly correlated.
3. Political Instability : Most of the known oil reserves are in West Asia (or the Middle East). The other major petroleum exporting countries are Russia, Nigeria, Indonesia and Venezuela. These countries have been politically unstable in the recent past and this has also led to the oil traders demanding a premium.
4. Speculations in Oil Futures by large amounts of funding also drive prices up.
5. Weak Dollar Policy : With most oil deals worldwide are priced in US dollars; and the dollar's devaluation puts on the pressure for higher oil prices. To maintain an income and purchasing power, raising prices has become a major strategy of OPEC members.
6. Rising demand from emerging nations like China and India. Rise in oil prices applies brakes to the fast growing economies.
7. Rising cost of corn and ethanol : An increase in oil prices increases the demand for alternate fuel i.e corn and ethanol; which increases costs of cattle feed and ultimately food-products. Inflation goes up sharply resulting in cracking of the economy.

Gold vs Liquid Gold
Gold / Oil prices have maintained a ratio of ~15 for half a century, but the sudden steep surge in oil prices has resulted in this ratio halving! Also, a strong negative correlation is seen between the Gold/Oil price ratio and Dollar/Euro conversion rate.