Why do oil prices vary so much?



  1. 0 Votes

    There are several forces that cause oil prices to vary so much.

    1) Supply: a group called the Organization of the Petroleum Exporting Countries (OPEC) controls most of the in-ground supplies of oil and they agree on how much to take out of the ground to make sure that oil prices stay within a certain range, the favorable range for OPEC is between about $30-$70 a barrel.

    The market responds to reserves, which is the amount of oil that is known to exist and profitable to extract at the current market price using current technology. If a technology is developed that extracts oil for a cheaper price then reserves go up because oil that was known about but too expensive to extract is now extractable. Or, if a new discovery is made, like Chevron’s discovery in the Gulf of Mexico in 2009 (http://www.chevron.com/News/Press/release/?id=2009-02-05), then more supply means a cheaper price.

    The lower the supply the higher the price. The higher the supply the lower the price.

    2) Demand: the more oil that is demanded the higher the price is.

    The law of supply and demand works for many products to explain the price that we see in the market. But, for oil supply and demand have not corresponded as it does for other products. Other explanations both real and created exist to explain the volatility of oil prices.

    3) Storms: Hurricanes like Katrina caused oil platforms in the gulf of mexico to spill oil, top over and get lost at sea. This decreased production made oil companies lose money which caused them to increase the price of oil. Other events like this cause prices to rise temporarily.

    4) Efforts by oil companies: Oil companies have done many things to increase the price of oil. John D. Rockefeller created the idea of the trust, a trust is a group of companies that collaborate to do business. JDR’s company, Standard Oil, bullied its way into a monopoly on extracting, refining and selling oil and was broken up after much effort in the second decade of the 1900’s. Since the break up of Standard Oil into 32 companies they have re-concentrated into 6 companies: Shell, BP, Chevron, ExxonMobil, ConocoPhillips, Valero. These 6 companies control the oil market in the USA and many parts of the world.

    These companies have done things like half the amount of gas stations in the US in the last 40 years. They have decreased the number of days they have reserve oil for to decrease the supply of ready to sell oil. Also, since these six companies control most of the oil in the US when they feel that the public will allow it they increase price and when they feel like the public will not allow increased prices they stabilize them or decrease them.

    5) Type of oil left: As we switch to more expensive to extract and refine oil supplies the price of oil increases. The best example of this is the tar sand deposit in Alberta, Canada. The oil is trapped in sand and is below a forest. The trees and multiple meters of ground need to be removed to get to the oil and then it is in the form of tar-sand so it is expensive to refine into usable oil. As we switch to these types of petroleum deposits oil will increase in price.

    6) Global political instability: Some oil comes from areas of the world that are experiencing political unrest. For example in Nigeria, where we get about 10-20% of our oil, if an oil platform is stormed by disgruntled locals then production is stopped, and decreased supply increases price.

    There are probably other reasons for the varying price of oil but these are among the major ones.

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