4 Major Factors that Affects the Price of Crude Oil

The price of crude oil affects everyone, and it is big news when oil prices rise. We live in a global world where the price of oil becomes a global issue. It’s an issue felt around the world because of the significant impact it bears on almost every aspect of our daily lives. The products from refined crude oil play different roles in our daily lives as they are displayed on our tables as food and used on our bodies as cosmetics. The processed petroleum products also play a part in our health care system used in manufacturing the tools and packaging for our medications. They also play a significant role in transportation as we need products of crude oil to get around on the ground or by air and to heat our homes.

It’s no wonder then, that when the price of crude oil increases, the impact is felt by the whole world, in one way or another. We as humans have become so dependent on crude oil. The more modern our societies become, the more we need products created from refined crude oil. 

The question that arises is, with the amount of crude oil we use each day is how much supply is available? Also, at what cost? Supply then is one of the significant factors that affect the price of crude oil.

  1. Supply

When it comes to the current amount of crude oil available in terms of output OPEC has a limited supply of 61% of worldwide oil. The U.S Shale oil production has doubled in recent years, creating a glut, and igniting a battle over prices between the Shale Producers and OPEC.

The supply can easily be affected by accidents, political crises, and wars, making it a lot harder for refineries or traders to get access to crude oil. This keeps the supplies offline and drives the need for replacements that often cost higher to be found and purchased, thus driving the oil prices up.

Linked to supply is spare capacity, defined as the volume of oil production that can be brought online within 30 days and conserved for at least 90 days. Spare capacity is also the difference between a country’s current oil production and its maximum oil production capacity.

  • Demand

There are times when the need for crude oil is high. For example, during the wintertime in places like America and Europe when there is an increased need for heating oils. Alternatively, during the summer in places like the United States, where there is an influx of people driving long distances. Many people take advantage of the weather and the vacation months to travel as a family or in large groups for vacation, family reunions or other recreational purposes. During the height of the demand, customers are often willing to pay more for precious fuel. With this increase in order, the higher cost supplies need to be made available, thereby driving the price of oil up.

  • The Battle between Major Players Over Price Control

Linked to supply is demand, the more there are products produced, in theory, the cheaper they should be. However, if you double production at a lower cost, with demand remaining constant, in theory, prices should fall. However, in reality, several other factors affect the price of crude oil. One of those factors are the major players who control the production and the cost of crude oil.

There are several players when it comes to price control. One of the major players is OPEC ( The Organization of the Petroleum Exporting Countries). The organization came into existence in 1960 with five countries, namely Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Currently, there are a total of 14 member countries. This group includes some of the world’s most oil-rich countries. As a group, they control a large percentage of the oil reserves and produce at least 40% of the world’s oil supply.

OPEC’s aim is to manage the oil production of its member countries by setting crude oil output targets for each member except Iraq. Ultimately, in the end, production decisions are in the hands of the individual member countries. 

However, before OPEC burst onto the scene in 1960, the United States was the largest producer of oil and was in control of oil prices. All that changed when OPEC came into the picture and quickly took over and controlled the oil market for the last part of the 20th century.

 However, with the discovery of Shale in the United States and advances in drilling techniques, the United States is back in the limelight as a top producer of oil. The reemergence of the United States means there is now more stiff competition. OPEC does not control the market entirely, and sometimes there is a bit of tussle between the two groups about the control over price because they have different agendas.

In terms of the production of oil, there are different sources. Most of what we use today comes from conventional means and origins. However, with a growing demand for fuel, and the discovery of Shale in the United States, there is an increase in the creation and usage of light tight oil, known as shale. Shale oil found in impermeable shale and limestone rock deposit continues to grow with the demand. Shale oil is processed into gasoline, diesel and jet fuels. However, when it comes to extraction, it is extracted using hydraulic fracturing, otherwise known as fracking.

Shale oil is a lot costlier than conventional oil that mainly comes from the OPEC countries. As a means of saving cost, the Shale oil industry suspends its new wells when world oil prices dip as a means of saving costs. The Shale oil industry then ramps up production when prices are steady or whenever OPEC cuts its output. The effect of the ramping up of Shale oil production is that it limits OPEC’s pricing power.

  • Natural Disasters/Accidents/Geopolitical Issues

Many of the oil-producing countries are in parts of the world where historically there have been many geopolitical tensions. These tensions have in the past led to uprisings, revolutions, and even wars. These events often create havoc when it comes to supply and distribution. Spare capacity comes in handy in situations like these. Oil producers use the extra size to moderate the increases in World oil prices by boosting production to offset lost oil supplies.

Take for example, Iran. Currently, the United States is putting intense pressure on Iran. It recently announced new sanctions targeting an oil tanker network. This is just one more squeezing of Iran’s international oil shipments. This new sanction comes after Iran refused to go to negotiations unless it is allowed to export crude oil.

Another example is Venezuela, one of the founding members of OPEC; it is currently going through a crisis of its own. Venezuela is already battling with an unstable government and many people seeking refuge in other countries. Then there is Libya, with oil fields targeted by militia groups.

When crises like those mentioned occur, production and distribution of crude is interrupted or even stalled in some cases. This interruption puts much demand on the market, with oil producers needing to increase capacity in other fields, or looking for newer areas to expand.

In conclusion, the production, refining and distribution of crude oil are challenging. The world is going through changes, and new players will continue to rise with the introduction of technology and the shifting trends of global political power. Added to this is the increasing demand by a growing population with the need for crude oil growing in places like China. These changes mean that those who trade in oil need to keep paying close attention to not only the trends but to the geopolitical issues across the globe.

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