Factors Affecting Demand & Supply of Oil Prices

by Ross Lane; Updated September 26, 2017
As worldwide demand for oil increases, so do prices.

Crude oil supplies are crucial to the operation of developed countries, with 84,249,000 barrels consumed globally each day as of 2009. Because of the importance of oil supplies, fluctuation of oil prices can have a great effect on the global economy. The standard economic principle of supply and demand, based around the concept that the price of a product is directly related to relationship of supply related to consumer demand, applies to global oil prices and the resulting effects on worldwide economics.

Increased Oil Consumption

As the world's population grows, global oil demand increases accordingly. According to the U.S. Energy Information Administration's 2009 statistics, the U.S. led the world in global oil consumption with more than 18 million 42-gallon barrels consumed each day across the country. Oil demand is highest in developed countries, with China, Japan and India trailing the U.S. in oil consumption.

Oil Reserves

The ability to supply oil for world demand affects the ultimate price of the product. The world's supply of oil centers around the capacity of reserves. Reflected as the available supply, oil reserves are most often expressed in terms of "proven reserves." Proven reserves are expected quantities of oil, determined through analysis performed by geologists and engineers, that can be extracted with a high level of success using current methods. The potential of proven reserves can be increased through technological advances and further exploration of supply locations, as well as economic conditions that favor oil production.

Exchange Rates

World exchange rates directly affect the worldwide price of oil in terms of how the cost is reflected in national markets. The declining value of the U.S. dollar increases the impact oil prices have on the American economy. When oil prices increase, Americans must pay even more U.S. dollars to buy oil due to the reduced value of the currency. In cases of appreciation, such as when the euro strengthened in value, increased oil prices can be canceled out by a more valuable form of money.

Environmental Factors

The environment can have a strong effect on the global price of oil, in terms of drastically changing the ability to produce oil supplies. For example, in 2004, a number of devastating hurricanes hit off the southeast coast of the U.S. These hurricanes damaged oil supply facilities and reduced the flow of crude oil supplies to the U.S. Applying the economic principle of supply and demand, the decrease in oil production could not meet with consumer needs and caused an increase in oil prices.

Political Factors

Whenever a major oil producing country is affected by political conflict, that nation's ability to continue production will be affected. For example, the 2002 political strikes in Venezuela had a detrimental effect on the major oil producer's supplies, causing worldwide shortages and ultimately increasing prices due to disparities with demand. The Iraq war provided another incident of oil price increases, as the nation's production capability was affected due to military conflicts and terrorist attacks.

Speculation

Outside of physical supply of oil reserves, the financial market has the ability to change oil prices through speculation. Essentially, this means financial traders speculate on oil supplies through contracts that are for future shipments, rather than those currently being distributed. This speculation can lead to traders working to raise or lower the price of oil to receive desired profits on purchased contracts.

About the Author

Ross Lane began writing in 2009 with work published on the website GameObserver. He is a communication instructor at Boise State University and he received his Bachelor of Arts and Master of Arts in communication and journalism from Boise State.

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