There are a number of factors that
affect the worth of oil
simple economics of demand and supply,
exogenous or unexpected shocks
alternative energy sources, the movement
of the dollar and market speculation.
When economic activity increases in an
economy, demand for oil rises.
Without an identical rise in supply, the price of oil
will rise. When recession hit in 2008 and
economic activity dropped in many of the
world's leading economies, the price of
Brent plummeted from $145 a barrel in
July that year to below $40 within a
five month period. Thereafter China's
demand rose and prices higher over the
following five years. To control this
rising prices and efficient marketing
bring on extra supply. The supply of oil
comes from two broad areas OPEC and
non-OPEC nations. OPEC supplies around
30 million barrels of the one hundred
and fifty million barrels at the world
uses every day. Oversupply by OPEC
nations has been cited as one of the
main reasons behind the near sixty
percent dropping Brent from June 2014 to January 2015. What are the substitutes?
Good value alternatives will see the
price of oil drop. Nuclear, wind and crop based oil
are all good examples where consumers
could switch from one source to another
However this depends on a constant supply
and competitive pricing
An exogenous shock is an event that moves market prices, and cannot be
explained by economics. These are mostly
event risks that a sudden and
unpredictable. Natural events like
Hurricane Katrina in August 2005
provided a substantial exogenous shock to
the oil markets, immediately taking out a
substantial supply line. Terrorist
activity is another example.
With oil being priced in US dollars a move in the
foreign exchange markets will have an
effect on demand through price action. A
stronger US dollar against sterling
pushes down the cost of oil for us here
in the UK, this assuming all other
factors are unchanged or feed through
to prices at the pump. A weaker dollar
has the opposite effect. Oil prices are
set by the futures market and there is
much speculation as to where demand and
supply will be in the future.
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Will China announced more nuclear plans? Will the growing global population demand more
cars or air conditioning units? Will
government bring in legislation to
control the unabated use of oil based
fuels? This will all have an effect on
demand while new technologies, like
fracking, could bring on more new supply
For the moment, at least, there is still
plenty of easily accessible oil. However,
unless oil companies have the incentive
to invest in new exploration or build
new technologies to extract otherwise
inaccessible oil, there will come a time,
within a generation, that will see the price of all rise
through the simple economics of there
being limited supply in an environment
of increasing demand.
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