Oil is one of the most important commodities in our global economy. Similar to any other commodity traded in the free market, oil prices fluctuate over the time. Even more, the price of oil changes more frequently compared to other commodities. Moreover, the oil price impacts the vigor of the world economy.
Higher oil prices since 1999 contributed to the global economic decline in the year 2000 to 2001 and are slowing the current cyclical upturn. Due to the effect of oil price on world economy, it is important to study the factors impacting the oil price.
Many factors influence the oil price instability. For example, when the demand is more than the supply, the price increases, or the price may vary in different countries. The main question is what causes the oil price to increase and what steps should be taken in order to curb this undesirable increase. Macroeconomics answers this question by the tradeoff between supply and demand: the price of any kind of product increases if the demand becomes more than the supply. Crude oil as a commercial product would not be an exception.
Moreover, the global demand has been fluctuating during the last 10 years. The demand is increasing because of various reasons such as transportation which consumes the most energy, and has seen the largest demanding industry for oil in this decade.
Pollution and poverty can also influence the price of oil. Developing and oil producing countries often resort to increasing oil prices to be able to generate revenue and pay the bills and national debts. This will lead to inflation in food prices and increased poverty. As well, international agencies which often put limits on national pollution measures have certain policies that can force countries to control the burning of oil which is the biggest source of population. Such regulations may also influence the price of oil.
The customers expectation is that an increase in supply will decrease the price of oil and gas. There is always a movement on both sides of the supply-demand curve. Also, declining orders could drive the prices to a lower level. Both of these factors can influence the price of oil.
On the other hand, over the decades, Saudi Arabia has been following a sophisticated foreign policy and attitude that dictated it exploitation strategy of its oil reserves. This strategy took into account the political and regional stability as well as the stability of oil prices in the global market without compromising domestic economic needs.
To sum up, this research suggests that the reason the prices increase when the demands are more than the supplies. The global economy has expanded in the past hundred years, which increased the demand for oil though the oil prices were low. The solution to the current problem, the high price of crude oil, is that the developing countries have to guarantee that prices will be stable to some extent. This can be considered as a logical solution to the price fluctuation, and to maintain the market more stable.
— The writer is an economic analyst. She can be reached at email@example.com