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November 17, 2021

What Causes Changes in Oil Prices?

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Have you noticed that the price at the gas pump seems to change almost every day? You never know if the price when you need to fill up will be good, great, or awful. You might also notice that the price of heating oil for your space heater changes a lot. You might wonder why the gas utility prices for your home seems to fluctuate so often. The reason for this is the underlying price of oil. Unfortunately, oil is a very volatile market, and there are a lot of events and issues that can impact the price of oil. If you're curious about what causes changes in oil prices, this guide is for you.

Global Politics and OPEC

The Organization of Petroleum Exporting Countries (OPEC) produces 40% of the world's oil, and the actions of this group have a huge impact on the price of oil. OPEC is made up of 14 countries: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

If OPEC reduces their oil production, oil prices will rise. If they keep oil production high, the prices will fall. As you might imagine, there are a lot of reasons for them to act in a variety of ways – and they can change their minds any time. Political instability in these regions is common, and can drive prices up as well.

Changes in Supply and Demand

The price of any commodity is ruled by supply and demand. OPEC has a lot of influence on supply, but they aren't the only impact. People choosing to move to renewable energy can reduce the demand. Manufacturers using cleaner energy and creating electric and battery-powered cars also makes a big difference. Drops in demand can lower price.

Sometimes a new source of oil becomes the focus, like U.S. shale oil in 2011 - 2014. A new source of oil can drop prices by increasing supply. OPEC often acts to keep oil prices high, but in this case they let oil stay low so that the shale companies would go out of business – which worked. Increases in demand, or drops in supply, will similarly drive prices up. In the winter, local home heating oil prices go up because demand is high. Oil prices for home heating go back down in the summer.

Natural Disasters

Humans don't control everything in the world, especially when it comes to natural resources like oil. Hurricanes in Louisiana and Texas dramatically impacted the production of oil in those areas, causing a jump in prices until the areas recovered. Flooding in the Mississippi river can impact some areas of oil production, and natural disasters that affect OPEC nations can significantly impact prices.

The Price of Oil Impacts a Lot of the Economy

The price of oil definitely shows up at the pump. It also impacts today's heating oil prices. However, it impacts the economy much more that that. Many large companies on the stock market are oil companies, or depend on the price of oil for profitability. Traders also use oil futures to bet on the direction of the oil market.

When oil prices are high, people spend less money on other goods, which can depress the economy overall. From heating oil prices to the price of gas at the pump, it pays to pay attention to oil prices and understand why they change.

Noack Fece1948