The oil price is determined by supply and demand side factors. Rising oil prices are indicative of rising demand and/or shortages of supply. The oil price is also affected by market speculation.
Increasing demand will push up the price of oil. A short-term rise in demand could lead to a significant increase in price because supply is quite inelastic – at least in the short-term.
A significant cause of rising demand for oil is simply a growing global population. An increasing number of people have greater energy demands causing a steady rise in demand for oil
Secondly, economic growth is a major cause of rising oil demand. With higher economic growth, there is an increase in derived demand for transport, oil and also energy. In recent years, strong economic growth in India and China has led to a significant rise in demand for oil. For example, the growing middle class in China have aspirations to own a car, therefore the increase in income can cause a proportionately bigger % increase in demand.
Technology. In recent years we have seen new technology which has diminished the need for oil – more fuel-efficient cars, hybrid cars, switch to renewable energy. This has moderated the demand for oil, though greater efficiency has been outweighed by the growing demand – especially from emerging economies in S.E Asia.
With many goods, higher prices lead to lower demand as people switch to alternatives. However, demand for oil is notoriously inelastic because of the lack of available substitutes. Therefore, if the price rises, people are willing to pay the price.
In the long term, demand may become less inelastic because substitutes develop; but, at the moment alternatives are now widely available. This means as price rises, demand doesn’t drop off. People just pay the higher prices.