Who Determines The Prices Of Oil? Why Does It Fluctuate?
You get the petroleum products at one price today and tomorrow the prices are changed. They get low not as frequently as they get high. Have you ever wondered who actually changes the prices of the petroleum products? Is there any unseen force involved at the backstage that regulates the prices in the international market? The global economy is driven by the oil prices and especially in the recent years the significance of oil products has been felt even closer to the heart of many countries.
A brief history to a grand present
The importance of crude oil was not felt as badly as now till 1857. It became a symbol of power to the nuisance for the common man, when the wars were fought over the oil. The first ever commercial oil well was drilled in the year 1857 in Romania and after two year the petroleum industry was set up in USA. Oil replaced coal as the source of fuel in the year 1901. Production of oil became even more crucial in later years when a commercial well In Spindletop, Texas was drilled. This well produced ten thousand barrels of oil per day, it was more than all oil wells in US combined. More than 1,500 companies were chartered that year. The prices of oil started rising when the oil was discovered in Iran in 1908 and in Saudia Arabia in 1930. Since then the supply and demand and the market sentiment are causing havoc in the international market –and more wars are thought to be fought over oil.
The omnipotent of the industry
Who governs the changes? Who has the power? Who is the supreme? Actually the war of the oil producing countries is based on these three crucial questions. There are two big powers which regulate the oil industry.
The 40% of the oil reserves and production is ruled by 13 countries. These 13 countries are together known as OPEC, the acronym of the Organization of the Petroleum Exporting Countries. These countries can be called as the omnipotent of the oil industries. The list of these countries includes Venezuela, UAE, KSA, Qatar, Nigeria, Libya, Kuwait, Iraq, Iran, Indonesia, Ecuador, Angola and Algeria. The production level of oil is set up by the OPEC to control the demand and supply of oil worldwide.
The oil prices fluctuate too often
Since the OPEC regulates the production level, so it controls the price of oil as well. If the price of oil products increases or decreases, it is probably because of the OPEC. Although the price of oil has always seen the increase, but in the recent years there had been a great fall in the prices. To keep the prices somehow fixed in the international market, the OPEC has vowed to keep the prices up to $100 per barrel. But the prices of oil fell from $100 per barrel to below $50 per barrel in mid 2014. It was the biggest decrease in the oil price ever recorded –percentage wise. This happened because the OPEC started supplying oil in cheap prices to the international market. Noteworthy is the fact that the price of oil is also determined by the demand and supply of the other commodities such as bonds or stock.
Understanding the reasons for oil price fluctuation
As discussed earlier, demand and supply controls the oil prices. The recent history shows when the Europe and China cut off the oil demand, the prices of oil were decreased significantly in the international market. Since more oil was available to less consumption.
Another important reason which affects the prices of oil is natural disasters. It can be understood with an example. When the US was hit by the hurricane Katrina in 2005, it cut 19% of oil supply in the US. This natural disaster caused the price of oil raise by $3 per barrel in the international market.
The cost on the oil production also makes the prices to rise and fall. For instance the production of oil is cheaper in Middle Eastern countries compared to European. If there is cut in the supply from the Middle Eastern countries, then the prices of oil products increase relatively.
Like in the recent years, there had been a great political instability in the countries –especially Middle Eastern. Due to political instability the prices of oil products also fluctuate. When the war broke out in Iraq and Afghanistan in 2008, the price of oil reached $138 per barrel.
Recession is also a big cause of drop in the oil prices. During recession time, the use of transportation drops quite significantly. People start avoiding the expensive products and spend only on the basic needs.
Recession in China is the biggest contributor to recent fall in Oil prices. China was the biggest importer of oil in recent past due to its high growth. But due to slowdown in Chinese economy demand for oil has decreased.
Iran US Conflict Over
Iran was banned by UN to export its oil due to their historic differences with US. But now since US has allowed Iran to export their Oil has created a surplus demand in Oil. This has thus decreased the Oil prices. Oil prices currently is to their all time low as much as $25 per barrel.