Introduction
Like any other product, the oil price is determined by the interaction of supply and demand, with the oil market being a specific characteristic marked by its high volatility, fluctuating between rising and falling prices.
Furthermore, approximately 30 to 40% of petrol pricing is influenced by global supply and demand in the financial markets, in addition to the decisions of OPEC, geopolitical tensions and speculation.
In this article, we will delve into the key elements that drive oil prices: political influences, economic factors and technological advancements.
I- The different types of petroleum
There are several types of petroleum, classified according to their quality, that is, their density whether light or heavy and their sulfur content either low or high, which depend on the production deposit.
So, the crude oil is sold on international markets where the crude oil price and fixed according to three clues :
- Brent crude from the North Sea;
- The American West Texas Intermediate (WTI);
- The Dubai Light.
1- North Sea Brent
Brent crude is a type of light crude oil extracted primarily in the North Sea. It is a blend of production from various North Sea oil fields. This grade is used as a benchmark for Europe and much of the world.
2- West Texas Intermediate (WTI)
West Texas Intermediate (WTI), or Texas Light Sweet, is a type of crude oil extracted in the United States that is lighter than Brent crude, and that wti oil price is used as a reference for the American market.
It should be noted that WTI is also used as a raw material for oil futures with the New York commodities exchange, namely : the NYMEX.
3- Dubai Light
It is extracted from deposits in Dubai, Oman or Abu Dhabi in the Persian Gulf, and it serves as a benchmark in the Asian market.
It is a type of oil characterized by a heavier composition and a much higher sulfur content.
It should be noted that the higher the sulfur content of crude oil, the more expensive it will be to refine into light fuels such as gasoline, diesel, or heating petrol.
Furthermore, the heavier the crude oil, the more complicated it is to transform it into a light fuel.
II- Factors influencing oil prices
The oil prices today is determined, in addition to the classic mechanism of supply and demand, other factors, namely political decisions, economic factors and technological innovations.
1- Supply and demand
A- Offer
Generally the supply comes from companies that extract petrol, such as (Aramco in Saudi Arabia, exxon Mobil, Shell, BP, Total Energies…).
Thus, global production is controlled by OPEC (Organization of the Petroleum Exporting Countries), which is the largest organization that determines the international supply of oil by setting a production quota for each of its members.
This regulation of supply originates from OPEC’s goal of avoiding any possibility of a collapse in barrel prices following a high petrol production, which allows the organization to ensure a certain stability in the oil market.
It should be noted that Saudi Arabia is the world’s largest oil producer, with 10% of the world’s supply is provided by this Middle Eastern country.
B- demand
In fact, the demand for petrol comes from refiners who transform crude oil into products usable by end customers. These products include: fuels, heating oils, and raw materials for the petrochemical industry.
In principle, the law of supply and demand is a fundamental rule of economics, and the petrol market is no exception. Thus, in the event of a sharp increase in demand for petrol and a low supply, prices will rise.
It should be noted that global demand is driven primarily by consumption from major powers, led by the United States, which dominates global petrol consumption with nearly 20% of total demand, representing 813 million tons annually, closely followed by China with consumption reaching 755 million tons, with forecasts of become the world’s largest oil consumer by 2040, with a demand of approximately 15.8 million barrels per day.
India, for its part, ranks third with 257 million tons of crude oil consumed. Russia is also among the largest consumers of this fossil fuel, with a total of 175 million tons, while Saudi Arabia’s energy consumption reaches 171 million tons of petrol.
2- Political and geopolitical decisions
A- International Conflicts
International relations and geopolitical tensions are crucial factors affecting oil prices. Any disruption in diplomatic relations or conflicts between major oil-producing nations have a significant impact on the price of petrol and hydrocarbons in general.
As an example, the political instability following the war waged by the United States and Israel against Iran has led to acts of sabotage against petrol installations in the Middle East, resulting in a disruption of supplies and a drastic reduction in petrol production by producing countries, which has weighed heavily on the price of a barrel of petrol, especially with the fear that these geopolitical tensions will last and even worsen in the long term.
B- Role of oil organizations
The petrol market has one major distinguishing feature compared to any other market : petrol volumes are openly manipulated by the world’s largest exporters, who have grouped themselves within OPEC.
OPEC is a powerful alliance of petrol-producing nations operating as a producers’ cartel that collectively influences global petrol prices through production quotas and policies.
Their decisions can have a profound impact on the supply side of the petrol market, leading to price fluctuations that are felt worldwide.
It should be noted that at each meeting, OPEC members agree on the quantity of oil exported, there by influencing the market price. However, unanimity among members is required for a decision to increase or decrease oil production to be implemented.
Thus, by adjusting production quotas (limits of barrels per day that each member is allowed to produce), OPEC can increase or decrease global supply, thus playing a direct role in setting prices.
3- Economic factors
A- Inflation
Generally, the impact of inflation on petrol prices is reflected in :
a) Increase in production costs
High inflation increases the cost of raw materials, labor, and transportation needed for extraction and refining, which pushes the price of a barrel up.
b) Central bank response
To combat inflation, central banks raise their key interest rates, which can slow global economic growth and, consequently, reduce petrol demand and lower its price.
c) Inverse relationship with purchasing power
A rise in petrol prices, fueled by inflation, reduces household purchasing power, which in the long run can curb the consumption of goods and services and decrease energy demand.
B– Exchange rates (especially the dollar)
The US dollar is the reference currency in the market petrol in the sense that petrol purchases from international companies are made in dollars.
In this sense, buyers in countries whose currency is not pegged to the dollar, can profit from a depreciation of the dollar, while those in countries whose currency is pegged to the dollar incur a higher cost when purchasing petrol.
Fluctuations in the dollar therefore naturally impact the supply and demand of petrol.
a) Effects on demand
petrol purchases are made in dollars, and the depreciation of the US currency makes oil relatively cheap for countries whose currencies are not pegged to the dollar.
Therefore, the depreciation of the dollar tends to increase the real income of consuming countries, driving up petrol demand.
b) Effects on supply
Forage production activities are strongly linked to the price of petrol. In principle, the link between the two variables is generally positive in the sense that a rise in the price of crude petrol tends to increase the profitability of petrol fields and, consequently, production capacity.
Furthermore, the depreciation of the dollar generates inflation in petrol-producing countries, which translates into a reduction in their purchasing power and therefore real disposable income and, consequently, the income available for drilling and, of course, a decrease in supply.
Ultimately, the depreciation of the dollar tends to cause an increase in petrol demand and a reduction in supply, which in turn contributes to a rise in the crude oil price.
4- Technological innovations
A- Shale oil
Indeed, technological advances in oil extraction have transformed the industry. In this respect, the rise in shale oil production in the United States and Canada, for example, has added a new dimension to the supply side of the market.
This increased supply capacity has not only influenced prices but has also altered the traditional dynamics of global oil trade.
B- Alternative Energies
Demand for oil energy can be significantly reduced by using alternative energy sources such as nuclear power, vegetable oils, solar energy or wind power.
These energy sources are renewed at a relatively rapid rate, unlike fossil fuels such as coal, oil, and natural gas, which are the result of chemical transformations taking millions of years.
Thus, the increasing use of renewable energies will certainly result in a decrease in demand for fossil fuels and, obviously, a reduction in the long term in the price of oil.
Conclusion
The oil price is the result of a complex interaction between fundamental, geopolitical and financial factors, making this market structurally volatile.
Although the law of supply and demand remains the primary driver, the price per barrel is increasingly influenced by external factors.