Various Factors Affect Oil Prices
Crude oil is one of the most highly sought-after commodities. We may not be able to live without crude oil — we use it everywhere in our daily life from petrol we need to drive our car to clothes we wear. Like any other commodities, the oil prices depend on supply and demand factors. Additionally, geopolitical factors also play an important role in oil prices because only limited number of countries can produce oil. Unfortunately many of them are politically unstable or have a complex relationship with the US. Therefore, geopolitical factors much affect the oil prices. Geopolitical factors include conflict in oil-producing countries, the relationship between superpower countries, or political tension between these countries. The visual content above graphs the changes in oil prices along with world’s major events, using the data from Statistical Review of World Energy 2021 by BP.
The Beginning of the Modern Oil Industry: 1859
Oil became one of the most important commodities in the US soon after Edwin Drake discovered “rock oil” in Titusville, Pennsylvania in 1859. This marked the first oil rush in the American oil industry. The oil boom created volatility in the oil market which continued for the next few decades. The violent swings in the beginning of the graph were due to this Pennsylvania oil boom. Oil prices kept swinging until the Pennsylvania rush faded by 1900. However, after that the prices stayed rather stable until the 1970s, although there were some events that had impact on them. Such events as:
- Start of Russian oil exports
- Start of Sumatra production
- Post-war reconstruction.
As we can see, however, the swings were mostly between $20 – $40 per barrel (deflated price).
More Volatile in the Last Five Decades
Oil prices have been more volatile for the past five decades than it had been before 1970. Upward volatility was especially prominent during the following events:
- Yom Kippur War (6 October 1973 – 24 October 1973)
- Iranian Revolution (January 1978 – 1 April 1979)
- Invasion of Kuwait (2 August 1990 – 4 August 1990)
- Asian Financial Crisis (2 July 1997 – 1998)
- Invasion of Iraq (20 March 2003 – 1 May 2003)
- Arab Spring (December 2010 – 2013).
2018 also saw volatility in oil prices due to multiple reasons. One of them was the oil production reduction announced by OPEC in 2018, which rose the oil prices sharply.
To the contrary, there have been some events that led to fall in oil prices.
- Global Financial Crisis (2007 – 2009)
- Covid-19 Pandemic (November 2019 – present)
The Covid-19 pandemic is an on-going event that requires further observation. However, reports suggest that the oil prices recovered from the Covid-19 plunge quickly. The continued oil production restraint by OPEC mainly contributed to this speedy recovery. Another contributor is the increase in the consumption of crude oil. According to the report, the consumption plunged by 9% in the second quartile of 2020, but it has been picking up slowly since then almost to the pre-pandemic level.
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