Crude oil
Also known as kerosene, crude oil is among the most essential energy sources in the world. It is a liquid extracted from the ground through drilling. It mostly comprises hydrocarbons, which take up 50 to 97 percent of its composition. The other percentage comprises sulfur, nitrogen, oxygen, and metals, whereby metals only take less than 1% of the total composition.
Most people know crude oil for the part it plays in the functioning of automobiles. However, it does play an integral role in the world’s economy that a slight fluctuation in the price of crude oil can have a huge impact on the cost of living.
Understanding Crude Oil Prices
The price of crude oil fluctuates as a result of many influencers. Before we go any further, let us understand why crude oil sees larger fluctuations in prices as compared to other commodities.
OPEC
Being one of the major crude oil price influencers, the Organization of Petroleum Exporting Countries (OPEC) governs the majority of oil reserves in the world. Their scope of work is to increase and decrease oil production levels depending on the world’s demand. A decision from OPEC not to cut oil production can cause a significant decrease in prices.
Supply and Demand
As with any product, the supply and demand of crude oil go a long way in determining its price. When supply is high, demand decreases causing the prices to fall. When the vice versa occurs and demand increases with a lower oil supply, prices rise.
Natural Calamities
When natural disasters strike and affect the production of oil, price fluctuations happen. A good example is when Hurricane Katrina damaged the US refinery, paralyzing oil production in the Gulf of Mexico. That disaster had an unprecedented impact on oil production, causing the price per barrel to spike to more than $70.
It is only after President Bush’s contingency plan of releasing 30 million barrels of crude oil that the prices went down.
Politics
Politics is a major cause of crude oil price fluctuations. Especially in the Middle East, political unrest or any disruption of oil transportation can impact the supply chain, causing the prices to escalate.
Production Costs
The cost of production has a direct impact on the price of crude oil. Due to its abundance, the cost of producing oil in the Middle East is significantly lower than other oil-producing countries.
As such, when the oil supply from the Middle East is low, the world primarily relies on countries like Canada for oil. Considering that the cost of production in Canada is higher, the prices per barrel will go up.
CONCLUSION
The price of oil greatly affects a large percentage of the world’s economy. These fluctuations have a direct impact on every sector of the economy. Inflation, for instance, happens when oil prices go up, causing the cost of products and services to also go up. Crude oil prices affect the textile industry, automotive, healthcare, and many other industries, which is enough to show that crude oil impacts our lives in more ways than one.
