With every year to come, oil stands as a major player deriving the global economy. At initial years finding oil in the drilling procedure was a kind of annoyance as the perceived treasures were salt and water. By the year 1857 the very first oil well was discovered in Romania and since then the US petroleum industry came into practice facilitating international drilling.
A number of experts claim that the modern oil industry was born in 1901, and soon replacement of coal was taken place as the worlds’ major fuel source. The crude oil used as fuels is the primary factor that makes it the most valuable and high in demand commodity well.
What are the determinants of oil prices?
While oil being high in demand universal product the fact cannot be denied that the major fluctuations of price can drive potential economic impact. The basic factors that highly influence the price of oil being the supply-demand curve and market positioning.
The basic of demand and supply is quite forthright, the increasing demands lead to scarcity and hence the prices increase. While the demand decreases the abundance leads to lower prices. But the oil price mechanism is determined by the oil future markets and under these future contracts, the crude oil buyers, as well as sellers, are responsible to execute their side of the trade agreement on the agreed date.
The key factors that derivate the oil price are the market tendency. The concept that oil demand will enhance potentially at a point in the speculated time can lead to a potential increase in crude oil prices since in the extent the hedger spontaneously makes the future contracts.
The point where mechanics of oil prices don’t work
The supply-demand concept states that the higher the product is explored the lesser it would cost while other things being equal. It’s a synergetic shift. In the first place, the reason to produce more is its economic efficacies or may be lesser economic efficacies. If with the advancement of good stimulation technique is introduced that doubles the output in the smaller investment, then we can say the supply-demand concept the prices may statistically fall.
As a matter of fact, the supply has raised since the oil production in northern regions of America is at its peak, with the active field in Alberta and Dakota. Yet the commercial use in combustion engines is highly prevailing on roads and it reveals that the demand is keeping track with the supply the production capacities are greater, however, the crude oil refineries and distribution are limited. The basic barrier we cannot have oil reserves is due to the limited oil refineries that work up to their average capacities.
The influencing market forces on oil prices
Another pressure comes from the unions and interest groups. Perhaps the only giant interest group of oil price determinant is OPEC that consists of countries from the Middle East; Saudi Arabia, Qatar, Iraq, Iran, UAE, Angola, Algeria, Indonesia, Libya, Ecuador, Nigeria, Kuwait Venezuela hence the interest group influences 40% of the total oil supply.
Though there is no constitution that clearly states the OPEC is founded to fix crude oil and gas prices. However, by limiting production capacities OPEC can lead cause higher prices and supposedly enjoy better profits than the consequent states that sell in the world market on the predetermined rates.
Contrary to several products, the oil prices are not derived wholly by the supply-demand and market tendencies towards a tangible commodity, instead supply-demand and tendencies of future contracts that are heavily run by the speculators playing a major role in price derivation.