The oil market is an interesting animal. In 2004 the world spent a collective $900 billion on oil--the commodity that above all others drives the global, consumer economy with its exceptional levels of surplus energy and mobility. If the average 2005 price holds steady, the world will spend $1.5 trillion on oil this year--that's $600 billion more than in 2004. But what happens to all that money? Admittedly, a good portion of it goes to pay the cost of extraction and transportation. But not all... Take Saudi Arabia, for example. They produce roughly 1/8th the worlds supply of oil (10 million barrels per day, roughly). Their cost of extraction is an extremely low $4/barrel or so. So the Saudis have an excess of approximately $186 billion a year worth of oil revenues. Their government, thousands of subsidised princes and other normal expenses were easily met last year with that years paltry (!) $120 billion excess, so what will they do this year with their $60 billion windfall? You can't just take $60 billion and put it a savings account. The problem that the Saudis face is not unusual, however. The Japanese, Chinese, and other nations with a large trade surplus with the US are faced with a similar problem every year--what do I do with all these dollars? Invariably, they come to the same conclusion... buy US defecit notes.
Why do the Chinese and Japanese buy US notes (like Treasury Bills)? Because, by not selling their dollars for some other currency, and instead keeping their investment in dollars, they bolster the price of the dollar (more buying, less selling = higher price). This strong dollar then aids their economy, which is based on exporting to the US (strong dollar means goods from China appear cheaper to US consumers). So why do the Saudis buy T-Bills? Well, the same logic applies, to a degree: a stronger dollar means that when they do sell dollars to purchase something, it is cheaper for them. But the bottom line is that they hold dollars because doing so keeps the American administration (regardless of what party is in control at the time) happy--the Saudis, by denominating OPEC oil in only dollars, and then spending those dollars to buy T-Bills and the like, keep our dollar artificially high (the administration likes this because it facilitates our deficit spending and balances our huge trade deficit). It should appear blatantly obvious that without some chicanery, it isn't possible to maintain a trade deficit in the hundreds of billions of dollars year in and year out ($484 Billion in 2003). The US gets several hundred billion dollars worth of other nations produce and resources for free--or more precisely, as a direct result of the Saudis denominating OPEC oil in dollars. In fact, that $484 billion fits quite well into the world economic jigsaw puzzle--it's just about the value of the OPEC oil sold (in dollars) to nations other than the US.
So... where does this leave us? Well, it leaves a few bottom-line principles:
1. The US has a very strong interest in keeping the house of Saud in power--or at least someone in power who will do their bidding and force OPEC to denominate all sales exclusively in dollars.
2. It leaves most other nations--but especially the EU core of France and Germany--with a strong desire to break up this system. Witness the recent (April '05) comments by French Industry Minister Patrick Devedjian that Europe should adopt a Euro-denominated oil market as its policy--superficially because the Euro is "a more stable currency".
3. The US actually benefits from high oil prices--even though it acts as a brake on its own economy. For every billion spent domestically on higher oil prices, other nations buy an extra 4 or 5 billion dollars of trade deficit for the US--virtually "free" goods and services.
So is the US consciously pursuing a policy of raising global oil prices? That's a difficult argument to make, as the primary driver of price increases has been growing demand from China. However, US policy has been clearly pursuing the defense of the dollar-denominated oil market. Recent actions in Iraq and threats against Iran have had the effect of blocking an Iranian based Euro-market, setting up a base from which to influence future events in the region, and stirring up the Islamist hornet's nest--thereby placing the House of Saud in an ever-more dependent position.
That said, rising oil prices aren't good for the US indefinitely. At some point, the brake on the global economy becomes too strong, and they will trigger a world-wide recession--which will destroy demand overseas for US products, as well as demand for oil. This will remove the counterweight against the domestic economic brake of high-priced oil in the US. Where does this price-line in the sand lie? Who knows, but Europe and Japan are already on the brink of (or in) recession. At some point, this becomes a game of Russian Roulette, where one small move sets off a global deflationary spiral. It may well already be out of the hands of the American administration--if Chinese demands keeps rising and oil output can't keep up (there are signs that the Ghawar field may have peaked...), then we may already be locked in to such a scenario--even if it doesn't hit for one or two years.
I've written previously on the role of the oil market in world affairs.