By Jon Schaffer
USINFO Staff Writer

Washington – U.S. oil prices have dropped considerably over the last six months, but are likely to remain at historically elevated levels in 2007 due to political uncertainties affecting supplies, according to the U.S. Federal Reserve’s semi-annual report to Congress on monetary policy.

“Ongoing violence has diminished oil production in Iraq and Nigeria,” the report said. “The continuing dispute with Iran over its nuclear program threatens a possible curtailment of Iranian exports.”

The report also noted that increased government control of domestic energy industries in such countries as Russia and Venezuela, which has hampered investment by international oil companies, could also keep prices high.

Oil prices fluctuated considerably in 2006, the Federal Reserve said.  The price of West Texas intermediate crude oil averaged $66 per barrel in 2006 - about $10 per barrel higher than in 2005 - the spot price (the price of oil for immediate delivery) climbed from around $61 per barrel at the end of 2005 to a peak of $77 per barrel in August 2006 “as violence in the Middle East, a shutdown of the Prudhoe Bay oil field in Alaska, and forecasts of an active hurricane season led to increased demand.”

In January 2007, oil prices averaged $61 per barrel and had dropped to about $59 per barrel in late trading on February 13.

Also contributing to continued high prices, the Federal Reserve said, is OPEC’s reduction of its crude oil production to the lowest level since 2004 in response to the recent decline in oil prices combined with a modest increase in oil demand in developing countries over the past year.

Testifying before the Senate Banking Committee February 14, Federal Reserve Board Chairman Ben Bernanke said that based on quotes in the futures market (the delivery of oil in the future at a predetermined price), oil prices are expected to remain far below the price peaks in 2006.  The recent moderation in oil prices is one of the factors that in U.S. central bank’s forecast for steady moderate growth over the next two years, a gradual slowing in inflation and continued low unemployment.

If oil prices continue their recent trend, there will be further downward pressure on inflation, Bernanke said.  “But as we have been reminded only too well in recent years, the prices of oil and other commodities are notoriously difficult to predict, and they remain a key source of uncertainty to the inflation outlook.”

The full text of the report, in PDF (423KB) or ASCII (88KB) format, as well as Bernanke's testimony, can be found on the Federal Reserve Board Web site.