Fareed Zakaria argues that political instability and risk are the reasons why oil prices persist at high levels despite sluggish economic growth in much of the world. Geopolitics is an important factor. On the other hand, growth and urbanization in China, India and other parts of the developing world are trends that will continue to drive oil prices higher over the long term regardless of political developments.

Zakaria states:

The next time you pay $3.50 dollars for a gallon of gas, stop and think about a basic rule of economics. When demand is low and supply is strong, prices should fall. Right?

Now apply that to oil. People drive less in the winter. The American economy is slow. The Euro Zone has stalled. China and India are slowing down. So demand for oil worldwide is low. So why is oil trading high at $113 a barrel, more than twice the price it was trading at five years ago when the global economy was booming? What in the world is going on?

There’s a school of thought that suggests the global economy is doing better than we think. China and the U.S. are proving resilient to Europe’s problems and so traders are expecting renewed demand in the world’s two top economies. But another school of thought argues we’re in the midst of a bubble. Speculators have been driving up the price of oil and eventually it will crash.

Now I think that the economic fundamentals really can’t justify oil prices at their current levels. The real driver of high oil is not the stuff you find in the business section of the newspaper – the demand for oil in India and China. It’s on the front page: Global politics.

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