How is the Price of Oil Determined?
Frequently referred to as black gold, oil is one of the world's most influential commodities. It impacts our daily life on almost a second to second basis. Throughout the last century we have seen the price of oil skyrocket only to fall a short time later. This has happened on a seemingly random cycle for as long as I can remember. What may seem like a random inflation of prices is actually the product of a variety of different variables and decisions from regulators across the world.
One of the largest factors to determining the price of oil is definitely the output supply from the major oil producing countries. This output supply is dictated by OPEC(Organization of Petroleum Exporting Countries), and is determined by the current demand for oil in the countries that OPEC supplies. The United States(OPEC's biggest importer) demand for oil has a large impact on the output supply. The current US Oil Demand is calculated by the EIA(Energy Information Administration) in collaboration with the United States Government. While there is no way to be exact, these are close estimations of the amount of Oil the U.S. is expected to use in a given period of time. These estimates are definitely adjusted for times of peak usage, especially in the United States. This is the reason for the spike in prices around major Holidays and summer months when travel is expected to increase dramatically.
While OPEC may dictate the amount of oil that is supplied on a given day, the actual price is decided on the Mercantile Exchange. While similar to the New York Stock Exchange, the Mercantile Exchange is strictly for the trade of commodities and not stocks. These prices are impacted not only by supply and demand, but by investors who buy oil in preparation for the future demand. This in turn can also drive the prices up.
Despite the fact that the United States is the single biggest oil importing country in the World, the U.S. does in fact have their own oil reserves. The amount of oil reserves, and amount of oil reserves able to be drilled at a given time, also greatly impact the price of oil. The obstacle in drilling these reserves to lower our dependence on imported oil is that a number of these reserves are located in wildlife preserves and other environmentally sensitive areas.
There are a few other factors that impact the price of oil during a given period of time. One of the more important factors is the value of a country’s currency. While some experts have cited that there is little correlation between the two, when the value of a currency falls, the price of oil rises. There is little that can be done in the interim to change either of these events. Another factor to be considered is the amount of taxes put on oil by national and state governments. This can greatly drive up the price of oil, and that translates to the gas pumps. Another often overlooked variable that can determine the price of oil is the type of oil it is. There are two types of oil: light or sweet oil, and heavy or sour oil. The sweet oil is the oil that is easier to refine and is currently in low supply. The heavy oil has a much higher supply currently, but is significantly harder to refine which just brings added expense to increase the overall cost of the oil.
These are just a few of the variables that are involved with setting the price of oil. Hopefully this article has helped you understand the process a little better, and will give you a moment of clarity next time you are at the pumps.
