What effects the price of oil

What effects the price of oil

Why oil prices change

What effects the price of oil is not an easy question to answer. As with many commodities the drivers that move the price can be very hard to identify. As with any market situation nobody really knows for sure however by observing the price movements one can correlate movements to certain events in the news or economy.

Why Oil Prices Change

Back in 1999 crude oil was only $12 per barrel, cheap compared to the $142 it has touched recently. This huge price movement of crude oil has not happened simply because there is dramatically less oil left in the ground or because demand has suddenly multiplied.

It is estimated that only about 40% of the worlds oil that is extracted each year ends up being used as petroleum in our cars. Unknown to many the remainder of oil is used in thousands of different industrial processes that produce anything from plastics to aluminium. Much of the recent oil price increases have been attributed to the rapidly growing economies in China and India. Though this is true to a certain extent such economic expansions have been seen in the past without the knock on effects on oil prices (the best example being the so called Tiger economies in the 1990s).

It is estimated that only about 40% of the worlds oil that is extracted each year ends up being used as petroleum in our cars. Unknown to many the remainder of oil is used in thousands of different industrial processes that produce anything from plastics to aluminium. Much of the recent oil price increases have been attributed to the rapidly growing economies in China and India. Though this is true to a certain extent such economic expansions have been seen in the past without the knock on effects on oil prices (the best example being the so called Tiger economies in the 1990s).

Political instabilities have also been blamed for high prices and again this is only partially true. The ongoing war in Iraq has of course affect world supply and pushed prices higher. However the Middle East region (by far the biggest producer of oil) has long been highly volatile and by current estimates will continue to be so.

Mrrket sentiment effects the price of oil probably more than any other factor. As with all markets herd mentality prevails and fear of the unknown forces prices higher. The basic supply and demand do not warrant the doubling of oil prices in the last 12 months and as a result many beleieve that the commoditiy is due for a price correction. The counter argument to this is of course that we have now used more than half of the natural oil reserves and demand shows no signs of slowing. As a result over the medium to long term oil prices are likely to continue to rise significantly.