In the past decades, any changes in oil prices have been associated with political and economic chaos, and seen as a trigger for inflation and recession. As we all know, the price of oil affects a variety of goods and services because oil is used as an energy source in many economic activities. However, in the global market the price of oil is dependent by many different stimuli. In this blog, we would like to discuss the determinants of global oil prices.
#1. The Organization of Petroleum Exporting Countries (OPEC)
OPEC is an intergovernmental organization of 13 oil-exporting developing countries. Their main goal is to manage and unify the petroleum policies and procedures, and ensure prices remain stable within global oil markets. Nations of OPEC are responsible for 46% of the world’s oil production. OPEC can affect the price of oil by stimulating (increasing/decreasing) oil output among member countries.
#2: Supply and Demand
Demand for oil increases each year due to the global population and mean prosperity growth. As we all know, the best scenario for the global oil inventory will be when the supply will meet demand. However, often supply is a subject to a myriad of economic, political and technical forces. In the situation when production exceeds demand, surplus of oil can be stored. However, in the situation when consumption of oil exceeds demands, inventories can be used to meet the demand. Occasionally non-OPEC suppliers who generate 53% of the globe’s oil can be tapped. Nevertheless, they don’t have adequate reserves to dictate the oil prices and they can only respond to fluctuations of market. Where, OPEC can directly affect the market pricing, especially when the production of oil by non-OPEC countries falls.
#3: Restrictive Regulation
Government has also a big impact on the oil prices because the majority of globe’s oil reserves and production are controlled by government-owned corporation. As we all know in US each state has own gas prices. This is due to the state and local taxes, different level of competition in local retail market, as well as suppliers and environmental regulation specific for each state.
#4: Political Conflict
If oil-rich countries, such as Canada, become politically unstable, market could respond to this situation by increasing the price of oil so that suppliers are still willing to pay the highest bidder for a security.
Another unpredictable factor that could influence the oil prices is seasonal changes in weather. Hurricanes, tornados or thunderstorms can substantially affect production facilities and stimulate pricing spikes.