Oil price fluctuation is a concern for everyone from the average consumer to large companies. It can be hard to predict what prices will be when it comes time to buy heating oil or gas. But, understanding the factors that influence oil prices can help you plan accordingly.
As with any commodity, the laws of supply and demand determine prices. If there is more oil available than demand, prices will fall; if there is less than the amount needed, prices will rise. However, the factors that drive these changes are complex.
Political instability in the Middle East – which has the lion’s share of the world’s crude oil supplies – can lead to price spikes. Similarly, natural disasters can have significant impacts on oil prices, especially when they occur in regions that are heavily reliant on shipping infrastructure.
In addition, speculative demand shocks can have large immediate effects on the real price of oil. Such shocks have played a prominent role in many of the major oil price shock episodes since 1973, including those that occurred in 1979 (following the Iranian Revolution), 2003-2008 (during the global financial crisis), and 1998-2000.
These volatility-driven shocks disturb governments of exporting countries that rely heavily on oil revenues. Low prices force them to cut investments and human capital and high prices lead to demands for expenditure increases that may not be sustainable in the long run. Moreover, excessive price volatility can undermine economic development in those countries and even provoke interstate conflict.