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There might be more factors affecting the demand and supply but I agree with the article that the following few would be the most impactful.

Determinants of Demand:
1.Increased Oil Consumption (Increase in number of buyers)
2. Exchange rates
3.Environmental factors
4.Speculation

Determinants of Supply:
1. Political factors
2. Speculation
3. Technology (Increase in viability of substitutes)

*COMMENTS*
christian: oh wow yes this is a really good article. It really shows how erratic the demand and supply of oil can be due to the many different factors that can affect it
kurt:
Technology(supply)-supply for oil relies heavily on the amount of oil reserves that are available. The expected amount of oil can be predicted by geologist and engineers using advancements in technologies. These oil reserves can be expanded further by improvements in technology.
environmental factors(demand)-natural disasters which disrupt oil supplies may result in a huge loss of supply of oil while the demand for oil continually increases.

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by Ross Lane

Crude oil supplies are crucial to the operation of developed countries, with 84,249,000 barrels consumed globally each day as of 2009. Because of the importance of oil supplies, fluctuation of oil prices can have a great effect on the global economy. The standard economic principle of supply and demand, based around the concept that the price of a product is directly related to relationship of supply related to consumer demand, applies to global oil prices and the resulting effects on worldwide economics.

Increased Oil Consumption

As the world's population grows, global oil demand increases accordingly. According to the U.S. Energy Information Administration's 2009 statistics, the U.S. led the world in global oil consumption with more than 18 million 42-gallon barrels consumed each day across the country. Oil demand is highest in developed countries, with China, Japan and India trailing the U.S. in oil consumption.

Oil Reserves

The ability to supply oil for world demand affects the ultimate price of the product. The world's supply of oil centers around the capacity of reserves. Reflected as the available supply, oil reserves are most often expressed in terms of "proven reserves." Proven reserves are expected quantities of oil, determined through analysis performed by geologists and engineers, that can be extracted with a high level of success using current methods. The potential of proven reserves can be increased through technological advances and further exploration of supply locations, as well as economic conditions that favor oil production.

Exchange Rates

World exchange rates directly affect the worldwide price of oil in terms of how the cost is reflected in national markets. The declining value of the U.S. dollar increases the impact oil prices have on the American economy. When oil prices increase, Americans must pay even more U.S. dollars to buy oil due to the reduced value of the currency. In cases of appreciation, such as when the euro strengthened in value, increased oil prices can be canceled out by a more valuable form of money.

Environmental Factors

The environment can have a strong effect on the global price of oil, in terms of drastically changing the ability to produce oil supplies. For example, in 2004, a number of devastating hurricanes hit off the southeast coast of the U.S. These hurricanes damaged oil supply facilities and reduced the flow of crude oil supplies to the U.S. Applying the economic principle of supply and demand, the decrease in oil production could not meet with consumer needs and caused an increase in oil prices.

Political Factors

Whenever a major oil producing country is affected by political conflict, that nation's ability to continue production will be affected. For example, the 2002 political strikes in Venezuela had a detrimental effect on the major oil producer's supplies, causing worldwide shortages and ultimately increasing prices due to disparities with demand. The Iraq war provided another incident of oil price increases, as the nation's production capability was affected due to military conflicts and terrorist attacks.

Speculation

Outside of physical supply of oil reserves, the financial market has the ability to change oil prices through speculation. Essentially, this means financial traders speculate on oil supplies through contracts that are for future shipments, rather than those currently being distributed. This speculation can lead to traders working to raise or lower the price of oil to receive desired profits on purchased contracts.

About the Author

Ross Lane began writing in 2009 with work published on the website GameObserver. He is a communication instructor at Boise State University and he received his Bachelor of Arts and Master of Arts in communication and journalism from Boise State.

Photo Credits

Thinkstock/Comstock/Getty Images

Copyright © Leaf Group Ltd., all rights reserved.

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Factors Affecting Demand & Supply of Oil Prices

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Crude oil supplies are crucial to the operation of developed countries, with 84,249,000 barrels consumed globally each day as of 2009. Because of the importance of oil supplies, fluctuation of oil prices can have a great effect on the global economy. The standard economic principle of supply and demand, based around ...

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Fluctuation of oil prices and some factors

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Fluctuation of oil prices and some factors

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1. Oil prices may increase due to it being a finite resource and that production may fail to keep up with the pace of the rising consumers' demands thus a cost-push inflation to occur.
2. OPEC has the authority to change prices as well, contributing to the fluctuation due to more restrictions or changes in control/management of the resource.
(Sara)

*COMMENTS*
Ren: Interesting, I think this article has actually pointed out the 2 main factors that change the price of oil. Maybe I can do some more research to find out the other smaller but also impactful factors that affect the price.

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A look at the different factors affecting the price of oil in both short term and long.
Readers Question: I'm trying to update myself on what's happening with oil prices at the moment (partly to prepare myself for uni interviews) but I'm finding very conflicting articles, such as:

Article warning of oil rising to $150 at BBC

Oil drops below $96 on Italian debt fears at Washington Post

Oil nears $96 on Italian debt fears at NPC

Could you possibly explain to me what's really going on?
It's an interesting question, and in a way all three articles are sound economics. It is possible to have conflicting predictions for oil prices. Perhaps the easiest explanation is to consider both short term and long term factors.

Oil Prices Since 1987

Between Jan 1999 and Jan 2008, oil price rose from under $20 a barrel to over $130. However, during this long term price rise, there were still periods where oil prices fell.

Long Term Factors Pushing Oil prices Up

The first article is primarily concerned with oil price predictions over the next few decades. It states:

Growth, prosperity and rising population will inevitably push up energy needs over the coming decades," said IEA executive director Maria van der Hoeven. ( BBC)

The key word is 'over next few decades' This long term rise in oil prices could still see oil prices fall in short term due to the Euro debt crisis. But, in the long term, the price of oil is determined by 'fundamentals' - the long term growth in supply and demand. Long term oil prices are likely to rise if:

We experience a growth in world population.

Economic growth which leads to increased use of oil. (demand for oil arguably has a high income elasticity of demand, e.g. growing middle class in China can afford cars rather than bicycles, causing bigger % increase in demand.)

Given the rate of economic growth in China and India, there is the potential for a very rapid increase in demand for oil - especially if we don't find alternative energy sources.

Given the predicted rise in demand, it is highly unlikely supply will be able to keep pace. Oil is a finite resource, as we consume more, it will become increasingly difficult and expensive to extract oil prices.

Short Term Factors.

Oil is the most commonly traded commodity. The price of oil is highly volatile reflecting short term shifts in demand.

If the global economy, fell into a double dip recession then we would see a fall in demand for oil and therefore its price would decrease. As the articles suggest, the fear is that a Euro debt crisis could lead to a prolonged recession in not just Europe, but other countries; this would cause significant fall in demand for oil.

However, when the global economy recovers, you would expect a reversal of this trend, and we would expect to see a sharp increase in demand for oil pushing prices higher.

OPEC has some ability to influence prices by setting output quotas. Certainly if Saudi Arabia decided to significantly increase supply, we would expect oil prices to fall. However, the impact of OPEC has declined since the 1970s, when they were able to treble prices in a few months.

Inelastic Supply and Price of Oil

In the short term, the supply of oil is relatively inelastic. It takes time to alter the supply of oil. Therefore, if there is a shift in demand, it tends to cause a relatively big shift in the price. This contributes to making oil prices more volatile.
Related

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Factors Affecting Oil Prices in Short Term and Long Term - Economics Help

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A look at the different factors affecting the price of oil in both short term and long.

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The reason why fuel consumed goes down by more than the volume of traffic, is probably because price increases trigger more efficient use of fuel. The price elasticity of demand is averagely negative hence i can conclude that oil is less price elastic, consumers are less responsive to the price changes because it is needed for cars, people may have no choice but to pay the high price. (Sara)

raina : I feel that the increase prices in fuel would cause consumers to switch to other alternatives. It may seem that fuel is a necessity to power cars and vehicles but over time, the consumption of fuel would slowly decrease. A few examples of alternatives include carpooling to work/school or taking the public transport.

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One could think of a number of ways that someone could cut back on fuel consumption in response to higher prices. For example, people can carpool when going to work or school, go to the supermarket and the post office in one trip instead of two, and so on.

In this discussion, the factor being debated is the price elasticity of demand for gasoline. Price elasticity of demand for gas refers to the hypothetical situation if gas prices rise, what will happen to the quantity demanded for gasoline?

To answer this question, let's delve into a brief overview of 2 meta-analyses of studies of the price elasticity of gasoline.

Studies on Gasoline Price Elasticity

There are many studies that researched and determined what the price elasticity of demand for gasoline is. One such study is a meta-analysis by Molly Espey, published in Energy Journal, which explains the variation in elasticity estimates of gasoline demand in the United States.

In the study, Espey examined 101 different studies and found that in the short-run (defined as 1 year or less), the average price-elasticity of demand for gasoline is -0.26. That is, a 10% hike in the price of gasoline lowers quantity demanded by 2.6%.

In the long-run (defined as longer than 1 year), the price elasticity of demand is -0.58. Meaning, a 10% hike in gasoline causes quantity demanded to decline by 5.8% in the long run.

Review of Income and Price Elasticities in the Demand for Road Traffic

Another terrific meta-analysis was conducted by Phil Goodwin, Joyce Dargay and Mark Hanly and given the title Review of Income and Price Elasticities in the Demand for Road Traffic. In it, they summarize their findings on the price elasticity of demand for gasoline. If the real price of fuel goes, and stays, up by 10%, the result is a dynamic process of adjustment such that the following 4 scenarios occur.

First, the volume of traffic will go down by roundly 1% within about a year, building up to a reduction of about 3% in the longer run (about 5 years or so).

Second, the volume of fuel consumed will go down by about 2.5% within a year, building up to a reduction of over 6% in the longer run.

Third, the reason why fuel consumed goes down by more than the volume of traffic, is probably because price increases trigger more efficient use of fuel (by a combination of technical improvements to vehicles, more fuel conserving driving styles, and driving in easier traffic conditions).

So further consequences of the same price increase include the following 2 scenarios. The efficiency of use of fuel going up by about 1.5% within a year, and around 4% in the longer run. Also, the total number of vehicles owned goes down by less than 1% in the short run, and 2.5% in the longer run.

It's important to note that the realized elasticities depend on factors such as the timeframe and locations that the study covers. Taking the second study, for example, the realized drop in quantity demanded in the short run from a 10% rise in fuel costs may be greater or lower than 2.5%. While the short-run the price elasticity of demand is -0.25, there is a standard deviation of 0.15, while the long rise price elasticity of -0.64 has a standard deviation of -0.44.

Concluded Effect of Rise in Gas Prices

While one cannot say with absolute certainty what the magnitude rise in gas taxes will have on quantity demanded, it can be reasonably assured that a rise in gas taxes, all else being equal, will cause consumption to decrease.

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What's the Price Elasticity of Demand for Gasoline?

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An overview of 2 meta-analyses of the price elasticity of gasoline, which both predict that a rise in gas taxes will cause consumption to decrease.

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Oligopoly market structure in the Oil Industry

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Oligopoly market structure in the Oil Industry

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From the article I have learnt that the petroleum industry is an oligopoly with the biggest industry leader being Exxon Mobil. I have also learnt that the petroleum industry is more of an Oligopoly than a Monopoly as there are many other big competitors besides Exxon Mobil. Even though the 2nd and 3rd top petroleum companies, Chevron and ConocoPhillips, are severely smaller than the giant Exxon Mobil, their change in prices and supply have a huge impact on the overall market even for the juggernaut. This also doesnt prove that the industry is a monopolistic or perfect competition as the bars to get into the industry are incredibly high and no random person can decide to start a petroleum company.

*COMMENTS*
Ren: Very insightful article, I think what i can infer is that by the petroleum industry being an oligopoly instead of a monopoly stabilizes the prices of oil due to competition. This means that consumers can rest easy as they would not have to worry about the prices of petroleum skyrocketing suddenly.

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We all always have, knowingly or unknowingly, discussed amongst ourselves various types of markets. We often use these terms very loosely. Basically, there are three forms of market structure.

Monopoly - This can be defined in simple words as absence of competition. A single company or a group totally or nearly owns all market for a particular type of product or service.

Perfect Competition - In perfect competition there is a presence of various firms. No restrictions on entry or exit of firms. The product is homogeneous, and if one dominating company changes its price structure then other firms have to change their prices in order to remain in competition.

Oligopoly - oligopoly is a type of market structure in which there is very small number of firms which have maximum market share. Every firm is well aware of actions of other firm and decisions are made according to that.

As oil and gas industry is considered as a perfect example of an oligopoly type of market, we will mainly focus on the oligopolistic nature of oil.

Introduction

An oligopoly is a type of industry which is dominated by a few firms which shows highly relative and coordinated behavior. Some of the examples of an oligopoly include the telecommunication industry - in some countries such as US and Canada where small number of companies control majority of the market, and the oil industry- where prices of crude oil largely depends upon geopolitics and relationship between major producing nations.
Characteristics of oligopoly include:-

1. Dominating firms functions in accordance with each other so as to maintain output and pricing which results in their healthy balance sheets.

2. Significant obstacles to entry in the market due to high initial costs or limited resources. For instance, it is not easy to set up an operator firm to extract oil and gas.

3. The technology involved in production is stable. On the other hand, rapid innovation in technology encourages new entrants and price competition as firms with a technological and cost advantage will try to drive rivals out of business by lowering prices or by disrupting supply-demand chain. (One can easily relate this with recent downturn in oil industry.)

A cartel is a group or an organization through which members conjointly take decisions about prices and production. This also results in formation of center-spot from where whole industry can be controlled or maintained provided that there are no other powerful firms or groups present. One of the well-known cartels is OPEC (the Organization of Petroleum Exporting Countries), whose member countries manipulate production in order to maintain oil prices.

W. A. Leeman in his book The Price of Middle East Oil: An Essay in Political Economy (1962) perfectly penned nature of oil industry which holds true even today despite of presence of large number of firms. Oligopolists (major firms in oligopoly) hesitate to lower the oil prices in the fright of decrease in profit margins, and they are also hesitant to increase the oil prices in the fear that rivals will not follow and in turn loss of market share. Therefore they rely over the long run to maintain oil price and earn handsome profit margins. Another description for oil industry to be an oligopoly is the fact that presence of large number to consumers with compare to small number of sellers.

Oligopoly in Context of Petroleum Industry

In order to understand oligopolistic nature of the industry, we will firstly prove how petroleum industry is an oligopoly.

From above statistical depiction of ranking of major oil companies in the US according to their market value, one can easily point out that very few companies have control over the market. In order to understand it in a better way the calculations are shown in the adjacent table. The data in this table is extracted from the above graph. This shows that top 5 companies in the country control over 80% of the total market.

One way to analyze such behavior of oil companies is by applying game theory. Game theory helps us in the analysis of strategies used in different scenarios where the outcome of one competitor's choice of action depends analytically on the action of other competitors. This is an important tool in looking at activities in an oligopoly where individual firms are much aware of the behavior of other competitors.
Let us take an example of the current situation in oil and gas industry. We have two countries viz. A and B that produce a good percentage share of total world oil and gas production. Country A recently developed a new technology by which they can produce at mammoth rate from unconventional resources and that too at relatively lower prices, on the other hand, country B does not have such technology but still is a leader in production. These two countries, in terms of competitive behavior and market share, have the following option:

They can compete by trying to challenge the other's price, seizing the market and hoping to drive the competitor out of business, or

They can cooperate on strategies, each maintaining their market share

Here we are making use of payoff matrix to describe the basic competitive choices that they have at their disposal.

From the above matrix we can see that at any given period they face two choices: either make an agreement and abide to it in order to avoid the price war, instead enjoy market share, or initiate a brutal price war to increase market share, which may or may not be successful.

1. Assume that both the countries are keen to avoid price war and are mutually agreed to abide to the agreement and avoid price cutting. In such case, we end up in the upper left cell of the matrix and each country earns profits of $100 million.

2. Alternatively, suppose Country A decided not to follow the agreement and wants to enjoy handsome profits by snatching the market share. In such case we end up in upper right cell of the payoff matrix and results in tremendous increase in profits of country A. country B, due to this decision, experiences loss of market.

3. Or country B betrays country A and takes part of market share with strategically planned new price structure. This will result in loss of profits for Country A.

4. Finally, both companies enters into the competition by cutting prices. This triggers the brutal price war and also affecting other dependent industries. This will eliminate profits altogether. In other words, when each country acts exclusively in its own interest, a price war is unavoidable.

Article: Oligopolistic Nature of Oil

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Article: Oligopolistic Nature of Oil - Crude Companion

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We all always have, knowingly or unknowingly, discussed amongst ourselves various types of markets. We often use these terms very loosely. Basically, there are three forms of market structure. Monopoly - This can be defined in simple words as absence

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Future of oil prices due to oligopoly/monopolies

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Future of oil prices due to oligopoly/monopolies

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From the article, i learnt that the arrival of OPEC (the Organization of Petroleum Exporting Countries). bringing countries together to manage and limit production, thus bringing prices up much higher. As a competitive market, oil prices crashed. When a monopoly or oligopoly took over, prices rose to everyone’s benefit.

Also , in future, the economy and investors will see stable prices but maybe a possibility of increase in oil prices over time, which so far has also been the case. Oil will no longer be a free market. (Sara)

*COMMENTS*
Ren: I do also think that in the future the price of oil would stabilize but due to the larger competitors fearing that changing their price drastically would cause their profits to plummet.

raina : Companies use the need of oil as an advantage and continue to increase its prices. However, the article mentions that in the next 10 years, oil prices would be more stable which would benefit both the economy and investors as well as consumers.

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Oil prices rose throughout the 2000s before collapsing recently and shaking economies and governments across the globe. Indeed, as one of the foundations of the world's economy and financial markets, the oil and gas industry has played a major role in market crashes and recessions over time. We've moved from boom to bust and back again with relative regularity. Can we expect the same now that we've weathered this recent collapse? Within the context of what's happened historically, I think we can draw a pretty good picture of the future of oil prices.
From a free market to price-setting monopolies
First, let's consider where the oil industry came from. It was originally dominated by "wildcatters," cowboys who drilled as much as they could, anywhere they could. When overproduction crashed prices, they declared bankruptcy and moved, starting over when prices rose again.

Then, a handful of businessmen, John Rockefeller chief among them, took the industry and organized it. The group bought and controlled larger and larger parts of the whole, until it was in a position to manage production and prices. Standard Oil, at its peak, pretty much owned the industry and could set prices at will. At least this was the case until it was broken up into the smaller (but still huge) companies that we think of as the U.S. oil industry even today.

A similar scenario played out at the international level. Countries produced and sold as much oil as they could, until the arrival of OPEC (the Organization of Petroleum Exporting Countries) brought them together to manage and limit production-and force prices up much higher. As a competitive market, oil prices crashed. When a monopoly or oligopoly took over, prices rose to everyone's benefit. Small wonder, then, that countries around the world replicated Rockefeller's playbook.
The fracking boom
All of this worked, of course, until cheating became too rewarding. But prices were still much higher than they would have been, as open competition and production were kept out of the market. Then came the fracking revolution.

Fracking brought the return of the wildcatters, thousands of small companies drilling when and as fast as they could. These companies produced as much as possible in order to pay their bills and, consequently, drove prices down to levels that had not been seen in decades. The energy industry, which had developed in an era of prices managed by OPEC, got hit hard.

Which brings us to now. The collapse in oil prices largely solved the oversupply problem, as many of the smaller companies went bankrupt. It also laid the groundwork for a return to a more managed price structure. Large companies could now buy up those assets on the cheap, taking a much larger share of production-and enhancing their ability to once again keep prices higher than they would have been in a free market.
The future of oil prices
The next 10 years likely will be very similar to the later stages of the last industry consolidation, as this process continues. The economy and investors will see stable prices, which has largely been the case since the initial collapse. But we will also see prices that increase over time, which so far has also been the case. Oil will no longer be a free market, with the wild price cycles that entails, but a more managed one. In many respects, it will look much more like, say, the 1990s than the boom period (in oil prices) from 2003 to 2008 or the bust period from 2014 to recently.

Overall, the effects should be positive. Markets and the economy thrive on stability. While the collapse in oil prices was a tailwind for many sectors, the damage to the energy sector wiped out many of those gains. Moving forward, energy should be neither a significant headwind nor tailwind, but a solid foundation-which is what a sector this vital should be.

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From Boom To Bust To ... Stability? The Future Of Oil Prices

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Oil prices rose throughout the 2000s before collapsing recently and shaking economies and governments across the globe. Indeed, as one of the foundations of the world's economy and financial markets, the oil and gas industry has played a major role in market crashes and recessions over time.

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From the article I have learnt that Oil is perfectly price inelastic as the demand for oil is always present and increasing even as the price of oil increases.

*COMMENTS*
christian: this article is extremely insightful and goes into great detail how and why the elasticity of oil is inelastic which is due to factors such as its low availability of substitutes.(LOL)
kurt:
the lack of competition from other sources of energy meant that even the most significant changes in oil pricing would not affect the change in oil consumption
Ren: I agree with Kurt and I think that if electrical energy or nuclear energy becomes more viable in the future, oil will definitely be more price elastic as the substitutes would gain n demand.

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What this means for oil markets is that the kind of sustained uptrend that took crude prices from around $20/bbl in the late 1980s and early 1990s to over $100/bbl by 2007 is unlikely to be repeated. Given the greater elasticity shale oil has provided on the supply side, that was arguably already true.

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In the short term, demand for oil is inelastic. This means a rise in price only causes a small fall in demand. Demand is price inelastic because consumers need oil-based products, e.g. their car only runs on petrol.

However, in the long term, higher oil prices will encourage consumers to diversify consumption (e.g. buy hydrogen-powered cars e.t.c.) Therefore, in the long-run, demand may become more price elastic.
(Sara)

*COMMENTS*
Ren: Seeing how electric powered alternatives are already popular, I can see how the the price elasticity of oil might increase drastcally in the next 10 years as technology progresses

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A look into the effect of higher oil prices.
Readers Question: With oil prices rising towards $100, what are the economic effects of rising oil prices?
Demand for oil is inelastic, therefore the rise in price is good news for producers because they will see an increase in their revenue. Oil importers, however, will experience increased costs of purchasing oil. Because oil is the largest traded commodity, the effects are quite significant. A rising oil price can even shift economic/political power from oil importers to oil exporters.
Current Account
Higher oil prices will lead to an improvement in the current account position of oil exporters like OPEC countries. It will lead to a deterioration in the current account position of oil importers (e.g. Germany, China). Oil exporters will see an increase in foreign currency reserves which they could use to purchase foreign assets. e.g. Arabic countries, such as Saudi Arabia are an important purchaser of US securities.
Inflation

Inflation in 2008 due to higher oil prices.

A marked rise in oil prices will contribute to a higher inflation level. This is because transport costs will rise leading to higher prices for many goods. This will be cost-push inflation which is quite different to inflation caused by rising aggregate demand/excess growth.

Consumers will see a fall in discretionary income. They face higher transport costs, but don't have the compensation of rising incomes. Higher oil prices can lead to slower economic growth - particularly a problem if consumer spending is weak.
Monetary Policy
Cost-push inflation caused by rising oil prices presents a dilemma to policymakers. Higher inflation usually requires higher interest rates to keep inflation on target. But, to reduce inflation may not be appropriate because output could be well below full employment. Arguably, in early 2008, policymakers gave too much importance to the cost-push inflation and too little weight to the impending economic downturn.
Long-Term effects of higher prices

In the short term, demand for oil is inelastic. This means a rise in price only causes a small fall in demand. Demand is price inelastic because consumers need oil-based products, e.g. their car only runs on petrol.

However, in the long term, higher oil prices will encourage consumers to diversify consumption (e.g. buy hydrogen-powered cars e.t.c.) Therefore, in the long-run, demand may become more price elastic.

After the oil price shock of the 1970s, manufacturers also started to change their approach. US car manufacturers paid more attention to the fuel efficiency of engines. It has also created an incentive to develop alternatives to petrol cars

Also, higher oil prices will encourage firms to try and find more oil supplies, even if it is expensive. Since the oil price shock of the 1970s, a new wave of countries began producing oil. In countries, such as Venezuela, Russia and remote places like the Antarctic.
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Effect of Higher Oil Prices - Economics Help

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A look into the effect of higher oil prices. Readers Question: With oil prices rising towards $100, what are the economic effects of rising oil prices? Demand for oil is inelastic, therefore the rise in price is good news for producers because they will see an increase in their revenue.