What Causes Oil Prices to Increase? A Look at the Global Economy, Price History, and Production Rates

2008-09-29

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Black Gold

Oil, as one of the key few material goods on the planet, sets itself as a substance whose value sets economic trends throughout the world. It can affect inflation rates for dependent countries, dominate the domestic GDP for producing nations, and can cause crisis for all industries when it’s supply becomes scarce. In the current, post-9/11 world the cost of oil has steadily risen and the question is presented as to how much longer we will even be able to rely on this dominant energy source. Though tensions in the middle east and dwindling surplus seems the logical answer for the skyrocketing costs, there are a number of factors that play into setting oil prices.

Cause of Increases Prices

Often a rise in price has nothing to even do with actual socio-economic factors but instead estimations and fears that relate to the market. This is similar to many fields of financial and economic trade, yet their is an added object because of the control that the cartel OPEC has in the oil trade. Even if OPEC states that they will be completely able to supply the needed amount of crude oil there is often doubts of their actual ability to do so. The tension of the middle east play in big here both with the instability out of those nations but also the question as to whether places like Iraq will even have the ability to produce the expected amount of oil. There is also a new worry about continually receiving exports from nations who have a recent disdain for U.S. policy like Venezuala and Nigeria.

Impact of World Events

Of course actual events and shortages do affect this independent of expectations and nervous reactionaries. After WWII the price averages on barrels of crude oil remained fairly constant, only deviating in about a $2.50-$3.00 range of change. In 1973 the Yon Kippur war began between Israel and Syria and by 1974 the oil prices rose from about $16 a barrel to almost $40 a barrel. From that period until about 1978 the prices remained constant at which time the Iranian revolution occurred, followed by the Iraqi invasion of Iran in 1980. These are just some of the most notable examples of world events affecting both U.S. and world market prices.

Tracking Industrial Usage

Observation and analysis of the industries and the corporations involved in the field is another way of marking ways in which to stabilize costs. This can also involve the economic issues outside of the oil sale. Companies with large stakes in oil in recent years are leaking a certain amount of transparancy to the fact that they are having difficulties as to finding replacements for fossil fuels. Products which use oil also allow for a third-party affect on the price of oil through it’s demand. When there is decline in demand of items like automobiles or certain plastics then the needed supply of oil declines, lowering the price of crude oil.

The Final Price

When asking this question it is important to look at what factors make up the whole price of what we pay at the pump for the gas we consume. Gas price is made up of a number of costs that are removed from the simple price of crude oil. Though the percentages change quite often, in 2006 crude oil only accounted for 55% of the final price tag. The refining process made up for another 22%, while taxes averaged 19%. The marketing and distribution, which is common to all commercial avenues, was around 4%. The 55% mark for the crude oil is down from the 2005 mark of 61%, but is still a higher percentage than normally seen. This is for many of the factors previously mentioned.

Future Prices Expected to Climb

All charts tend to show the estimated price of gas going up in the next few years. Though conventional factors are still relevant and affect this spike the dominant reason is the lower production of crude oil in general. As this type of energy source runs lower in volume the price will continue to elevate. This is a simple economic formula stating that the less there is of somthing the more valuable it becomes. This is true of all rare minerals, which oil will be within the next twenty-five years. There is one final factor that affects domestic oil prices very much and that is the effect of aging refineries as well as the small number in the U.S.

This post is part of the series: Revolutionizing Energy

A series of articles that look at contemporary issues of energy with a focus on sustaining the natural environment and understanding the socio-economic factors related to energy consumption.