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Dr Praipol Khumsap, who has studied the issue in depth, spoke at a seminar on oil prices held by Thammasat University's Faculty of Economics on July 9, when the price of oil was still above $140 per barrel. He said the increase in the price of oil from $25 per barrel in 2002 to $70 in 2007 and from there quickly to $140 at the beginning of July 2008 was due mainly to the following factors:

1) Opec's excess capacity has shrunk continuously, going from an abundant 11 million barrels per day in 1985 to 3-4 million barrels per day in 1995 and down to a very low 1 million barrels per day in 2006.

This shows that the demand for oil has increased faster than the expansion of capacity throughout this 21-year period. Before 2002, the price was $20-$25 per barrel, not high enough to attract further investment to expand production capacity.

In 2005, when the oil price surpassed $60 per barrel, additional investment took off in drilling and refineries. Construction was expected to take about three years before it would result in increased production. However, the additional expansion of capacity during 2005-2006 was still not sufficient given the rapid increase of demand for oil during the same period.

2) The US dollar had been depreciating up until the first quarter of this year against other hard currencies such as the euro. Wanting to maintain their real income, oil-producers increased the dollar oil price to compensate.

3) The Chinese economy and other emerging economies are growing fast, leading to a rapid increase in international demand for oil, which has cut the excess capacity of Opec to its current sensitive level, as explained earlier. Even when the oil price jumped from $25 to over $60 per barrel in 2005, growth in these emerging economies was still strong and the demand for oil still growing faster than the expansion of capacity.

4) Oil has become a commodity that is actively traded in major markets, not only by oil-traders proper but also by hedge funds. A lot of trading in the futures market for oil is done without actual delivery. Such speculative trading generates a higher degree of fluctuation in world oil prices. Whenever oil-traders foresee an increase in the demand for oil or whenever there is an incident which may negatively affect the output of any producer, oil-traders place purchase orders which speed up increases in the oil price.

5) This year to June there was political tension concerning Iran and its nuclear capabilities. Oil-traders are afraid the conflict may expand, disrupting oil production in the Middle East, so they placed purchase orders which pushed up the price to a very high level in June and the beginning of July.

At that point both Dr Praipol and Weerapol Jirapraditkul, director of the government's Energy Policy and Planning Office, agreed that if political tension in the Middle East did not escalate, the oil price would not increase further, for the following reasons:

a) The price of $140 per barrel makes it very attractive for producers to expand production capacity both in drilling and refineries, and the expansion this time will be far greater than the additional investments made when the price was $60 per barrel. As a consequence, oil-traders can expect an increase in capacity that can keep pace with or even outpace increased demand for oil.

b) The US dollar, which had depreciated up until the first quarter of this year, started to appreciate in response to Fed policy. There is no further need to compensate for a depreciating US dollar.

c) The world economy started to slow down as a result of higher energy costs and higher inflation, which cut into spending. Starting July 14, the oil price stopped increasing and decreased rapidly to $120 within only two weeks, as a result of factors explained earlier.

Furthermore, the fall of Freddy Mac and Fanny Mae, which almost went bankrupt and required intervention from the US Treasury, convinced everyone that the US financial market could not recover fast and that financial institutions in the US were not be in a position to extend credit to support private investment for a while. As a consequence, we cannot expect a fast recovery of the US economy. At the same time, the economies of the EU and Japan have slowed down and even contracted in the second quarter. Both are now in recession.

Economies in Asia, which enjoyed good growth at the beginning of the year, have since begun to experience a slowdown in exports to the G3 and also slower domestic expenditure as a consequence of higher inflation. They are adjusting their growth forecasts downwards.

Asean countries, which originally forecast a growth rate of 4.3 per cent this year, have adjusted this down to 2.6 per cent. Under these circumstances, oil-traders and hedge funds see clearly that the demand for oil will slow. At the same time, the capacity expansion that started in 2005, when the oil price jumped to over $60 per barrel, is nearly complete and should be functioning soon, and additional capacity expansion is on the way. High oil prices of over $100 per barrel have led many to believe that production capacity should expand faster than demand for some time. As a consequence, oil-traders and hedge funds have placed sale orders and pushed down the price to its current level $110-$120.

It is widely believed that if the political tension in the Middle East does not escalate, the oil price should not register an increase for the rest of this year and well into next year. Investors and manufacturers should have the leisure to prepare production plans. The inflation rate will not increase due to the more stable oil prices, even though this will not be immediately felt as the increase of the oil price in the first half of the year will generate a second-round effect in the second half of the year.

These factors are beneficial to economic growth, as there will not be any pressure to slow down consumption and private investors will not be worried about the ever-increasing cost of production. Investment in stocks to support normal production will return, and the economic wheel should start turning and running at a normal rate again.

However, we still need to pray for the situation in the Middle East to stay calm, as it appears to be now, and to not escalate to the point of a serious confrontation. If the situation worsens, no one can really predict where the oil price will go, and its effect on the economies of the world will be beyond anyone's imagination.

Until next Monday.