Advertisement
What Affects the Oil Price?
Every person on earth and every industry in the world is affected by the oil price. Every night we watch the news, waiting to see if it’s gone up or down. If the price has decreased, we sigh with relief. If it has increased, we groan and moan.
But do you understand why the oil price fluctuates and what makes the price spike or dip? It’s not because there is a surplus or shortage of oil, for your information. The reasons behind the variations in price are much more complex than that. At the same time, though, it’s really easy to grasp.
Here are the key factors that influence the oil price, explained so that anyone can understand them:
OPEC
The Organization of Petroleum Exporting Countries (OPEC) is responsible for roughly 40% of the world’s oil and about 60% of all the oil traded on a daily basis. These are huge percentages of the global market share and it affords OPEC a considerable amount of clout. With this power behind them, they are able to control – and stabilise – the oil price to a certain extent. When it goes too high, OPEC can produce more oil to bring the price down. In a similar fashion, they can decrease production to push the price higher.
Global oil reserves
If you understand how OPEC influences the market, you’ll also understand how global oil reserves affect the market – it’s a fine balancing act between supply and demand.
But let’s first look at what ‘global oil reserves’ are. It really is in the name – excess crude oil can be stored in global reserves until it’s needed.
Now let’s look at how these reserves can affect the oil price.
Whenever the world experiences a shortage of crude oil, the price of this commodity shoots up. To bring the price down, the market makers will release oil from the global reserves. On the other hand, the focus will shift to limiting the release of reserves when the oil price is low. The concepts behind these strategies are tried and tested marketing tactics – to increase price, you increase demand; saturate the market and you push the price down. It’s basic, but it works.
World crises and natural disasters
When unrest or a natural disaster threatens an oil producing region, it affects the markets greatly. Why? Simply put, in one word – uncertainty. When traders can’t predict what the effect of a crisis or disaster will be, they have to forecast market trends and buy or sell according to their calculations. More often than not, the outcome is predicted to be negative – think hurricanes that destroy oil drills – and the oil price shoots through the roof. Only when the real consequences of the crisis or natural disaster are revealed will the market show signs of stabilising. The opposite could of course also happen – the oil price could go even higher.
Right now, the price of crude oil is hovering around $100 a barrel. A fair amount of speculation is currently taking place at oil conferences around American shale gas drilling and the effects it can or might have on global oil markets. The truth of the matter is that only time will tell. But perhaps you might now be able to hazard more accurate guesses when asked for your opinion.
Advertisement
