Global Industry: Factors Affecting Oil Prices

Oil prices are factored into the economic growth of most nations because it is used as a basic energy source in the production of a majority of goods and services. The international price of oil and the global oil market are both complicated. Based source FXDailyReport.com The oil price is dependent on a multitude of factors and some of them that affect international oil prices are detailed briefly in the paragraphs below.

Factor #1: OPEC

OPEC expands to Organization of Petroleum Exporting countries and it refers to a consortium that is made up of 13 nations: Ecuador, Algeria, Indonesia, Angola, Venezuela, Nigeria, Libya, Kuwait, Qatar, Iran, Iraq, Saudi Arabia and the UAE. These are countries that produce oil and constitute about 40 percent of the total production of oil in the entire world. These countries draft the policies and systems among the member countries that control worldwide consumption. The price of crude is affected when OPEC increases or decrease oil production.

Factor #2: Demand and Supply

The inventories that are maintained in the global oil stores control worldwide supply and demand. When the production is much more than demand, the excess is stored. In the case when consumption is more than the demand for oil, the inventories have to be tapped. These corrections control the oil prices. Though the rest of the world produces over 50 percent of the world’s oil, they do not have enough production reserves so as to be able to control oil prices. However, OPEC is always in a position to control the global prices of oil, especially when the rest of the world produces less.

Factor #3: Restrictive Legislations

Most of the oil reserves and production facilities around the world are controlled by government run companies. This has resulted in a lot of politicization of related issues and therefore oil pricing is complicated and not competitive. Oil-rich nations have taxes and policies that affect price of oil and government actions that affect the production of oil causes its prices to vary in the commodities market on a regular basis. Other factors include local taxes, environmental regulations that require special formulations, proximity to the gasoline suppliers, etc.

Factor #4: Political Unrest

In the case when an oil rich nation becomes politically unstable, supplier markets hike up the crude oil prices. The supplies are then taken by the highest bidder. A perception of shortage of crude can increase its prices even if the production levels still remain unaffected.

Factor #5: Oil Production

When oil is produced in a particular country’s reserve, the cost of production depends on many factors such as the geological properties of the area in which the oil well has been found, the location where the reserve has been spotted and the amount of oil that is present in the oil reserve. There is also a constant effort for exploration to tap into hitherto not-found oil reservoirs. There is a huge cost associated with the related activities of setting up plants and the development.

Factor #6: Financial Markets

Brokers connect crude oil buyers and sellers in the financial markets. Brokers trade contracts that would deliver oil in the future at a specific price to hedge against future increase in prices that would affect profits adversely.

Factor #7: Seasonal Consumption

As with any other commodity, changes in weather affect the oil demand throughout the world. Whereas more oil is used for heating purposes in the winter, during summer consumption of gasoline is very high. Thus there are price variations to meet oil consumption and demand with the turn of every new season. Extreme weathers can affect the production facilities and cause price hikes in oil costs.

Factor #8: Value of the US Dollar

All the oil in the world is traded using US dollars as exchange. Depreciation in the value of the dollar, therefore, causes a spurt in the oil prices because of the increase in demand. On the other hand, if the dollar value rises, the price of oil comes down due to a decrease in demand.

Factor #9: Speculative Buying

Speculative buying in the commodity market also creates price variations for oil and other oil-based products. Sometimes speculators have succeeded in hiking up prices to unsustainable levels in the market by making artificially higher price bids. In such cases the prices fall down when it is clear that there is not enough demand to justify the high prices.(source: Oilpro.com)