Researching oil prices and working to understand oil commodities can be overwhelming at first, says Charles Reed Cagle. But while the relationship between the factors that affect oil prices can be complex, the factors themselves are easy enough to understand.
Supply Affects Oil Prices Says Charles Reed Cagle
Just as with all commodities, supply and demand are the two largest factors that determine oil price, says Charles Reed Cagle. We’ll cover demand in the section below.
Supply is how much of a product is available. For oil, supply numbers are determined by the Organization of Petroleum Exporting Countries–more commonly referred to as OPEC+ (the plus stands for allies not technically included in OPEC). The countries who make up OPEC are:
- Equatorial Guinea
- IR Iran
- Saudi Arabia
- United Arab Emirates
The United States of America is not a part of OPEC, but it is starting to play a bigger role in the supply side of oil as shale fields are tapped.
When major oil-producing companies are pumping a lot of crude oil, supply is high. To the general public, high supply can seem like a good thing. After all, we don’t want to run out of oil, right?
While a true shortage of oil would be a global disaster, a supply that’s too high in relation to demand can cause problems for the economy as well, says says Charles Reed Cagle. If we have more oil than we need, prices start to fall.
At first, this seems like a boon. Lower prices mean more money in your pocket. But as companies lose money, they lay off workers they can no longer afford to pay. Stocks plummet. Unemployment rises and burdens the financial system. The economy stalls.
Generally speaking, the higher the supply in comparison to demand, the lower the oil prices.
How Demand Affects Oil Prices
Demand is the global need for oil says says Charles Reed Cagle. When people are traveling more and factories are producing more, the demand for oil rises in correlation with that consumption. When demand is balanced with supply, prices hold steady. When there is less demand than supply, prices drop.
But if demand is high and there isn’t enough oil to meet that demand, that’s when prices skyrocket. Travel companies, refineries, and oil companies start competing to gain access to the oil they need to stay afloat, and so prices go up as they basically start a bidding war.
OPEC+ works to ensure that the balance of supply and demand remains as steady as possible to ensure stability.