Many factors influence oil prices. There is a mistaken belief that OPEC sets the global oil prices. It did so only till the mid-1980s. Now, OPEC does not control oil prices. Its focus is to stabilize global oil markets by restraining their productions.
Oil Price Determination: Impact of Demand and Supply
The global oil market prices are primarily influenced by demand and supply forces. The level of supply is largely dependant on the availability of oil in the reserves. Supply shortage causes an upward movement in the price pressure.
This may be due to factors such as:
Supply levels are established by OPEC to a large extent because market demand and consumption levels in the US influences oil prices drastically. The demand for oil spikes during peak seasons, particularly during the summers. This is because it is usually the season of winters and vacations. So, the demand for heating oil escalates.
Oil Pricing: Trading in Oil
Major petroleum exchanges are:
- New York Mercantile Exchange
- International Petroleum Exchange in London
- Singapore International Monetary Exchange
Movements in these exchanges and speculations on oil futures also have a significant bearing on oil prices.
Other Factors Affecting Oil Prices
Oil pricing is also affected by the following miscellaneous factors, such as:
- Oil extraction and processing costs: Higher costs result in higher petroleum prices.
- Peak oil concerns: Global concern on reaching peak oil (highest extraction point) also increases oil prices.
- World crises in oil-producing nations: This leads to huge price spikes as observed in July 2006 during the Israel-Lebanon war.
- Factors affecting refining capacity: Natural factors such as hurricanes and floods hamper the refining process, especially in coastal reserves. It results in oil price spikes and directly influences the cost of refining.
- Tightening of world oil market: This happens in terms of lowered inventory.
- Political and Economic Factors: Economic factors generally have a long term effect on oil prices. However, in the Middle East and Gulf regions, they result in immediate fluctuations. Political factors have different implications. Expected events do not create much difference in oil prices but unexpected events do.
- Taxation: Taxes form a considerable component of oil prices. The rate of taxes varies from country to country and could be as high as 50%.
Oil prices are vulnerable to both supply and demand fluctuations and external shocks that can be natural, political or economic. In the coming years, this will remain a major challenge to overcome for both oil producing countries and the world economy as a whole.