Crude oil is one of the natural fossil fuels that is mined from the beneath the surface of the earth that originates from the geological formations. In the extraction process, machines are used to drill the sedentary rocks to the basin where these deposits are. It is needless to mention that crude oil is one of the energy sources that are vital in manufacturing and production processes across the world’s economy. It is a strategic kind of an asset that affects most parts of every economy. The crude oil price has been known to fluctuate year after year.In the early 70s, the world market encountered many disruptions because of the oil embargo imposed. Afterward, these disruptions have been fuelled by both political and economic factors. Numerous studies have been done to address various hypothesis arising from this subject according to Brahmasrene et al. (408). Bariviera et al., (426) in his study, has also outlined some of the economic variables that affect the efficiency of information relevant in the stock and bond markets that influence price fluctuations. These variables include liquidity and extension in the financial crisis in the markets.
Price Fluctuations The oil prices worldwide are mainly driven by changes that occur globally in the supply and demand of the commodity. Additionally, there exist some geopolitical factors that will slightly influence the price. The oil market prices are regulated by the Organization of the Petroleum and Exporting Countries (OPEC).This ensures that oil prices per barrel of crude oil are maintained at stable levels. They have a target set for the oil price per barrel to remain at approximately $30 per barrel. This has not been possible in some years.
Figure 1: The Mean annual OPEC crude oil prices ranging from 1998 to 2018 (in U.S. dollars per barrel)
Source: OPEC Oilprices.com
According to the figure above prices for last 20 years have been fluctuating from time to time. In 1998 the oil price per barrel was the lowest at about $12.28.Since then, the prices have been on the increase. Annually, the years 2011 to 2013 experienced the highest oil prices of $107.46, $109.45 and $105.87 respectively. For the last four months in this year, the oil price has a mean of $64.7
In the year 2005, the southern Gulf Coast of the United States was greatly affected by Hurricane Katrina. This external factors caused stoppage of oil production in this area which is a great supplier of this scarce commodity. This causes a reduction in supply while the demand for oil remained constant. This caused an increase in price per barrel to over $70.As a result of this crises to save the market, the then president of United States had to release about 30million barrels oil in the Strategic Petroleum Reserve (SPR) which helped to put the oil prices down.
Since the mid-year 2014, the prices of oil were noted to decline significantly more than other years. This was mainly caused by financial crises in the markets worldwide. The prices of most products that use oil in manufacturing such as; metals raw materials and agricultural products declined significantly. This resulted in a decrease in demand for oil globally which resulted to decline in oil prices. After the rise in prices that was experienced in 2011 to 2013, OPEC also exercised its pricing policies that resulted in lowering of the prices onwards.
The political instability in most producing countries also has a significant influence on the fluctuation in oil price. The wars experienced in the Middle East caused a great impact on this market since this part is one of the greatest producer of oil worldwide. For instance, in July 2008 there was an increase in price to about $136 per barrel. This was catalyzed by the wars in Iraq and Afghanistan. During this time, the buyers were not fully convinced that this supplier was capable to deliver the normal quantity demanded in a circumstance of war. In this environment of the market, some major economies such as America had to reduce their big consumers of oil in order to save money.
The economic recession is another factor that affects the oil prices. At this time there is a reduced demand in quantity demanded of the oil. According to the law of supply and demand, when the quantity demanded decreases the prices decrease. This is because the consumers have a lower consuming power that causing the suppliers to reduce. (Gale, 155).
The production costs in different oil producing countries influence the rise or fall of the oil prices. For instance, the production cost of fuel in the Middle East is relatively lower compared to the costs incurred in the production of oil in the Canada oil sands. Since this is a nonrenewable resource, when oil from places with low production costs is exhausted, this will cause an increase in fuel prices significantly. Similarly, some economies such as the United States oversupplies this commodity in the market. If they withdraw this supply into the market, this forces the fuel prices up.
Implications
High fuel prices have caused many governments to find out ways of cutting costs to reduce expenses. Fuel is needed to propel vehicles. When these prices go up many citizens are forced to use public means instead of driving own vehicles. This will eventually reduce the amounts quantity demanded to some extent. Employers also at such times allow employees sometimes to work from their home once or twice a week. This also will reduce expenses on fuel. The overall effect will cause a decrease in demand will force market forces to lower the cost to equilibrium. Consistent low oil prices have adverse effects on exporting economies. Commerce and tourism activities. Considering the relations between Russia and Asia, if a recession is experienced by Russia, will cause a reduced growth in Asia. In terms of inflation, the price of oil has a positive relationship with the inflation rate. When oil prices move down, the inflation level also will move down and vice versa. This is because oil is a major input in many economies. It is the engine that drives transportation and heating in homes. End products prices also are dependent on the oil prices. Statistics mention that in the 1970s when the oil price rose significantly from $3 to $40 the consumer price index that is used to measure inflation rose from 41.2 to 86.3.This is about a double rise in inflation. The sector also has offered numerous employment opportunities to many people worldwide. The exhaustion of the oil from the deposits in any given country will render many citizens jobless. This is because this sector has given opportunities to millions of individuals from extractors to the large stage of production.
Conclusion.
Crude oil prices over the last 2 decades have been having a lot of fluctuations. In the last 20 years, the price of oil was least in 1998 at a cost of $12.28.Annually, the years 2011 to 2013 experienced the highest oil prices of $107.46, $109.45 and $105.87 respectively. In the current year, the oil prices have had a mean of $64.7.These oil prices are regulated by OPEC member countries. These members have a set of policies that help to make the fuel prices stable hence preventing overexploitation. As realized in our study fuel fluctuations are caused by, forces of demand and supply in the market, OPEC influence, the adverse impact of natural calamities such as the Hurricane, the difference in production cost in different economies, political instability and influence of interest rates. These fluctuations greatly affect the welfare of citizens in any country. The tourism sector is affected by the purchasing power of citizens is affected. The normal working routines of employees are disrupted with many opting to work from home to save on high fuel costs.Additionally, since fuel is most in many industries for the production of finished products, a rise in prices results to increase in prices of these commodities and vice versa.
Works Cited
Bariviera, A.F., Guercio, M.B.,Martinez, L. B. 2012. A comparative analysis of the informational efficiency of the fixed income market in seven European countries. Economics Letters, Vol. 116, No. 3, p. 426–428.
Brahmasrene, T., Huang, J.-C., Sissoko, Y. 2014. Crude oil prices and exchange rates: Causality, variance decomposition and impulse response. Energy Economics, Vol. 44, p. 407–412.
Gale, D., 1955. The law of supply and demand. Mathematica scandinavica, pp.155-169.
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