Crude oil is a non-renewable source of energy that is highly valuable. As such, the fluctuation of oil prices is not an uncommon occurrence. However, it is an aspect that affects how traders and other individuals buy or sell oil.
In this article, we will highlight the factors that affect the prices of crude oil.
Let us delve into specifics.
Supply and demand
Crude oil prices can change rapidly in response to policy changes, new cycles, and fluctuations in the world market. These prices vary greatly and react to many variables such as consumer demand and overall supplies.
Oil-producing companies in Venezuela, Iraq, Saudi Arabia, Iran, and Kuwait formed OPEC in 1960. OPEC is an international body that determines global oil supplies. By controlling oil supply, they can regulate the prices, making it more efficient and economical to consumers.
Additionally, an increase in industrial production and economic growth can elevate the demand for crude oil.
In the past, political events have triggered the disruption in the supply of crude oil, causing prices to shift drastically. The Iran-Iraq and Persian Gulf wars, as well as the Iranian revolution are some of the historical events that have caused massive fluctuations in these prices.
Apart from war events, other disasters have also had an impact on oil prices.
Here are a few examples of disasters that influenced oil prices:-
1. In January 2020, the Coronavirus (COVID-19) pandemic forced many governments to close down businesses and restrict travel as a safety measure to stem the virus. These drastic actions lead to a drop in the demand for crude oil.
2. In August 1990, the Gulf war lowered oil production, leading to a spike in crude oil prices. However, these prices later declined after the war ended.
3. In August 2005 and May 2011, Hurricane Katrina and the Mississippi river flooding recorded the largest weekly hike in gasoline prices, which left billions in damage after oil facilities were destroyed. These destructions reduced the flow of crude oil supplies, thus affecting the prices.
Exploration, manufacturing of various commodities and innovations are environmental factors that affect crude oil prices.
The same applies to unpredictable weather patterns such as long and cold winter months that cause a drastic drop in temperatures. Such low temperatures lead to an influx in energy consumption, causing an increase in the demand for crude oil; thus hiking oil prices.
Additionally, fossil fuels contribute greatly to global warming and the greenhouse effect, further affecting the environment.
Political disruptions in the world biggest oil-producing Middle East countries such as Saudi Arabia, Iran, and the United Arab Emirates [UAE] have influenced the oil market over the years. With a decrease in supply from these countries, oil prices go up affecting the world’s economy in more ways than one.
Another great example of how politics affect crude oil prices was witnessed in the 2002 political strikes in Venezuela. They affected major oil producer’s supplies, causing an increase in crude oil prices due to disparities with demand.