Factors That Affect Oil Price

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Oil powers the world's developed nations and their economies. Many factors and events can influence the price of oil, such as international political unrest or natural disasters. Other oil price influencers, like drilling bans, have nothing to do with the availability of the commodity itself, but rather the international oil market's interpretation of their potential long-term economic effects.

Supply

  • No one can state with certainty how much undiscovered oil exists on the planet. When a new major oil discovery is announced, it forecasts an increased supply. Any time supples of commodity rise and demand remains relatively flat, prices decline. Conversely, if international oil supplies decline due to production cuts while oil demand remains flat, prices rise.

Demand

  • During periods of robust global economic activity, the demand for oil rises. This is particularly true if no new oil discovies are announced that would help offset that increased demand. In emerging markets such as China and India, their increased wealth and the corresponding growth of their domestic automobile fleets put increased pressure on oil prices. A report by Congressional Research Service states that as China and India will import larger amounts of oil as their economies grow, increasing worldwide demand.

Restrictive Legislation

  • If a nation announces that it is curtailing or banning oil exploration in an area known to have large confirmed oil deposits, such as the Gulf of Mexico, commodity markets price the "loss" of this potential new crude oil production into current oil prices. According to a report by the U.S. Energy Information Administration, the Gulf of Mexico accounts for 30 percent of domestic oil production. Legislation curtailing Gulf oil production would impact future oil supplies and drive oil prices higher.

Political Unrest

  • If an oil-rich part of the world such as the Middle East experiences political upheaval, oil futures markets react by bidding up the price of oil futures contracts to ensure that supplies are still available to the highest bidder. In this example, the perceived loss of oil is enough to drive oil prices higher, even if oil production remains constant.

Declining Production

  • During the first half of the 20th century, the United States was the world's leading oil producer and exporter. As domestic production of oil has begun to fall, the United States must import increasingly larger amounts of oil to fuel our economy. This places additional pressure on supplies and generally leads to higher oil prices.

Natural Disasters

  • In 2005, when Hurricane Katrina struck the oil platforms in the Gulf of Mexico, there was an immediate spike in the world price for oil. When these oil supplies were temporarily taken off the market from damage by Katrina, oil prices began to increase rapidly.

Speculative Buying

  • Oil prices are also influenced through the speculative buying of commodities traders. In 2008, the price of oil reached $140 per barrel. Conjecture centered on the idea that speculators were bidding up oil prices and creating a "bubble", an unsustainable price level. By late 2009, oil prices had fallen by more than 70 percent into the $30 per barrel range because the demand was not present to support the inflated price level oil had attained.

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