The Oil Industry and the Factors that influence Oil Prices – Chapter 7: The Supply of Crude Oil and Its Prices

This is chapter number 7 out of 10. Read the rest:

Read The Oil Industry and the Factors that influence Oil Prices – Chapter 1: History of the Oil Industry
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 2: Oil Prices Determinants
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 3: The Sentiment of the Market
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 4: The Origin of Oil and its Composition
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 5: The Drilling & Production of Oil
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 6: Comprehending Price Fluctuations

The petroleum prices are, as discussed, determined by the laws of demand and supply. Because petroleum is a critical commodity for many industries, its price is extremely sensitive to events that might disrupt its supplies. In fact, between 1992 and 1997, in four of the five major increases in gasoline prices were a result of spikes in petroleum prices. The 1973 price spikes were a result of the oil embargo imposed by the Arabs. The 1978 Iranian revolution, the 1980 Iran/Iraqi war and the Gulf War in 1990 all accounted directly to the increase in gasoline prices at the retail end. When crude oil prices reached record high levels in 2007 due to mainly China insatiable demand for energy, it also prompted record high gasoline prices in theUS. Other factors which also contributed to this situation were the decline in the value of the US dollar and political upheaval in the oil producing countries.

Supply And Demand Imbalances In The Gasoline Sector:

The laws of supply and demand are also applicable in the gasoline sector. Its supply is a result of available stockpile, crude oil prices, refining capacity and import of gasoline. The stockpile act as a buffer between short term shortfall between supply and demand thus their available levels can seriously affect gasoline prices. Any factors which resulted in the decline of this stockpile will cause wholesalers to offer higher prices to secure the available is response to the concern that further supplies may be disrupted.

Imbalances between supply and demand of gasoline can also result form consumers switching from one type of fuel to another. For example, car owners may switch to a cleaner type of fuel and this cause a surge in the demand of this type of fuel. Refineries in the meantime will need time to readjust their production capacity to cater for this upsurge in demand this type of fuel. We know that all commodities prices fluctuate however gasoline price are more volatile as it has no viable substitute yet.

In 2008, crude oil prices from $69 per barrel shot up to nearly $150 per barrel. After 3 months, the price of crude plummeted together with the crashes of financial institutions at Wall Street.  It is thought that that the surge in prices was a result of speculative investments which fueled a speculative bubble in oil prices. As overproduction and profit-taking finally takes hold, the bubble burst prompting a collapse in the price. Although theUSeconomy was suffering from a credit crunch due to the collapse of the housing market, this has nothing to do with oil prices. The prime catalysts for the spike in oil prices came about from the speculative trading in the Futures market as well as from the meeting rooms of OPEC. 

Read The Oil Industry and the Factors that influence Oil Prices – Chapter 8: The Components of Gasoline’s Retail Price
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 9: When Supply and Demand isn’t the answer
Read The Oil Industry and the Factors that influence Oil Prices – Chapter 10: Conclusion