What Is Oil?
Oil prices: what does it depend on?
For decades now, oil is considered to be the engine of the world’s economy, affecting the economic policies as well as the world trade. Most nations of the world depend on oil trade to stimulate their economy and whenever there’s a sudden price drop or unexpected, it sends fears and uncertainty across board. Oil prices are subject to busts and booms; it depends on the business cycle, economic conjuncture and crisis. As we understand what drives oil prices, it will help us to work toward a healthier economy. Let’s take a look at the more obvious dependent factors that oil prices depend on: supply, demand, geopolitics and weather/natural disaster.
Supply
Oil supply is regulated by a committee of oil producing nations with pseudonym, ”the Organization of the Petroleum Exporting Countries (OPEC)”.The body has an overbearing influence on oil prices by setting production targets for its members, even though, the production decisions are mainly in the hands of the individual members. The 70% of the world’s oil exports and world’s largest oil reserves are supplied by the OPEC countries (Saudi Arabia, Russia, United States, China, Iran etc.).
In addition to exporting these precious commodity, each country keeps a sizable reserve for future events, sometimes resulting to product depletion and other potential dangers (e.g. oil spillage) that affect prices.
Rising prices indicate shortfall in supply (that additional supply is needed), while falling prices indicate, there is a surplus supply for current demand.
Demand
Industrialization is one of the key factors that affect oil prices and therefore crude oil—demand and supply. Growing economies increase demand for crude oil to boost their energy sector. Many countries’ transport sector is almost totally dependent on gasoline and diesel fuel to function and this adds to high demand for the product. When the demand rises, it leads to oil price adjustment according to what suppliers can offer.
Geopolitics
Geopolitical events have proven in recent time, to be a determinant factor to oil prices. These events create uncertainty about future demand or supply, which lead to high volatility in prices. The volatility of oil prices is as a result of low responsiveness or supply fall created by the political upheaval in the affected region. Switching to other source of energy within that short term becomes so challenging and the resultant effect is price surge.
Most of the crude oil reserves in the globe are sited in the regions that are prone to political unrest where the disruptions of oil exploration activities have been enormous. Most notably are the Iranian revolution, the Arab Oil Embargo in 1973–1974, the Iran-Iraq war in the 1980s, and the Persian Gulf War in 1990–1991. In recent years, conflicts and political events in the Persian Gulf, the Middle East, Venezuela and Libya have contributed to increases in oil prices and world oil supply disruptions.
Weather/Natural disaster
We have had in recent years where a number of meteorological events have affected global oil prices and supply. A good example is the Hurricane Harvey that shut down the entire Texas oil exploration in 2017. Oil demand has really affected since March, 2020 as a result of the global COVID-19 pandemic, resulting to shortfall in oil supply and prices. Oil prices have continued to depend on natural disaster and other meteorological events.
In conclusion, major changes in global oil prices in the past years have demonstrated how oil prices can be dependent in all of these factors which makes it difficult to make projections in future.