Price of oil
The price of oil, or the oil price, generally refers to the spot price of a barrel (159 litres) of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Basket, Tapis crude, Bonny Light, Urals oil, Isthmus, and Western Canadian Select (WCS).[1][2] Oil prices are determined by global supply and demand, rather than any country's domestic production level.
This article is about the price of crude oil. For information about derivative motor fuels, see gasoline and diesel usage and pricing. For detailed history of price movements since 2003, see World oil market chronology from 2003.
The global price of crude oil was relatively consistent in the nineteenth century and early twentieth century.[3] This changed in the 1970s, with a significant increase in the price of oil globally.[3]
There have been a number of structural drivers of global oil prices historically, including oil supply, demand, and storage shocks, and shocks to global economic growth affecting oil prices.[4]
Notable events driving significant price fluctuations include the 1973 OPEC oil embargo targeting nations that had supported Israel during the Yom Kippur War,[5]: 329 resulting in the 1973 oil crisis, the Iranian Revolution in the 1979 oil crisis, the financial crisis of 2007–2008, and the more recent 2013 oil supply glut that led to the "largest oil price declines in modern history" in 2014 to 2016. The 70% decline in global oil prices was "one of the three biggest declines since World War II, and the longest lasting since the supply-driven collapse of 1986."[6]
By 2015, the United States had become the third-largest producer of oil and resumed exporting oil upon repeal of its 40-year export ban.[7][8][9]
The 2020 Russia–Saudi Arabia oil price war resulted in a 65% decline in global oil prices at the beginning of the COVID-19 pandemic.[10][11] In 2021, the record-high energy prices were driven by a global surge in demand as the world recovered from the COVID-19 recession.[12][13][14] By December 2021, an unexpected rebound in the demand for oil from United States, China and India, coupled with U.S. shale industry investors' "demands to hold the line on spending", has contributed to "tight" oil inventories globally.[15] On 18 January 2022, as the price of Brent crude oil reached its highest since 2014—$88, concerns were raised about the rising cost of gasoline—which hit a record high in the United Kingdom.[16]
Structural drivers of global oil price[edit]
According to Our World in Data, in the nineteenth and early twentieth century the global crude oil prices were "relatively consistent."[3] In the 1970s, there was a "significant increase" in the price of oil globally,[3] partially in response to the 1973 and 1979 oil crises. In 1980, globally averaged prices "spiked" to US$107.27.[3]
Historically, there have been a number of factors affecting the global price of oil. These have included the Organization of Arab Petroleum Exporting Countries led by Saudi Arabia resulting in the 1973 oil crisis, the Iranian Revolution in the 1979 oil crisis, Iran–Iraq War (1980–88), the 1990 Invasion of Kuwait by Iraq, the 1991 Gulf War, the 1997 Asian financial crisis, the September 11 attacks, the 2002–03 national strike in Venezuela's state-owned oil company Petróleos de Venezuela, S.A. (PDVSA), Organization of the Petroleum Exporting Countries (OPEC), the 2007–08 global financial collapse (GFC), OPEC's 2009 cut in oil production,[17] the Arab Spring 2010s uprisings in Egypt and Libya, the ongoing Syrian civil war (2011–present), and the 2013 oil supply glut that led to the "largest oil price declines in modern history" in 2014 to 2016. The 70% decline in global oil prices was "one of the three biggest declines since World War II, and the longest lasting since the supply-driven collapse of 1986."[18] By 2015 the United States was the 3rd-largest producer of oil moving from importer to exporter.[7] The 2020 Russia–Saudi Arabia oil price war resulted in a 65% decline in global oil prices at the beginning of the COVID-19 pandemic.[10][11]
Structural drivers affecting historical global oil prices include are "oil supply shocks, oil-market-specific demand shocks, storage demand shocks", "shocks to global economic growth",[4] and "speculative demand for oil stocks above the ground".[19]
Impact of rising oil price[edit]
The rising oil prices could negatively impact the world economy.[145] One example of the negative impact on the world economy, is the effect on the supply and demand. High Oil prices indirectly increase the cost of producing many products thus causing increased prices to the consumer.[146] Since supplies of petroleum and natural gas are essential to modern agriculture techniques, a fall in global oil supplies could cause spiking food prices in the coming decades.[142][147] One reason for the increase in food prices in 2007–08 may be the increase in oil prices during the same period.[148]
Bloomberg warned that the world economy, which was already experiencing an inflationary "shock", would worsen with oil priced at $100 in February 2022.[126] The International Monetary Fund (IMF) described how a combination of the "soaring" price of commodities, imbalances in supply and demand, followed by pressures related to the Russian invasion of Ukraine, resulted in monetary policies being tightened by central banks, as some inflation in some countries broke 40-year-old record highs.[149][126] The IMF also cautioned that there was a potential for social unrest in poorer nations as the price of food and fuel increases.[149]
Impact of declining oil price[edit]
A major rise or decline in oil price can have both economic and political impacts. The decline on oil price during 1985–1986 is considered to have contributed to the fall of the Soviet Union.[150] Low oil prices could alleviate some of the negative effects associated with the resource curse, such as authoritarian rule[151][152][153][154][155] and gender inequality.[156][157] Lower oil prices could however also lead to domestic turmoil and diversionary war. The reduction in food prices that follows lower oil prices could have positive impacts on violence globally.[158]
Research shows that declining oil prices make oil-rich states less bellicose.[159] Low oil prices could also make oil-rich states engage more in international cooperation, as they become more dependent on foreign investments.[160] The influence of the United States reportedly increases as oil prices decline, at least judging by the fact that "both oil importers and exporters vote more often with the United States in the United Nations General Assembly" during oil slumps.[158]
The macroeconomics impact on lower oil prices is lower inflation. A lower inflation rate is good for the consumers. This means that the general price of a basket of goods would increase at a bare minimum on a year to year basis. Consumer can benefit as they would have a better purchasing power, which may improve real gdp.[161] However, in recent countries like Japan, the decrease in oil prices may cause deflation and it shows that consumers are not willing to spend even though the prices of goods are decreasing yearly, which indirectly increases the real debt burden.[161] Declining oil prices may boost consumer oriented stocks but may hurt oil-based stocks.[162][163] It is estimated that 17–18% of S&P would decline with declining oil prices.
It has also been argued that the collapse in oil prices in 2015 should be very beneficial for developed western economies, who are generally oil importers and aren't over exposed to declining demand from China.[164] In the Asia-Pacific region, exports and economic growth were at significant risk across economies reliant on commodity exports as an engine of growth. The most vulnerable economies were those with a high dependence on fuel and mineral exports to China, such as: Korea DPR, Mongolia and Turkmenistan—where primary commodity exports account for 59–99% of total exports and more than 50% of total exports are destined to China. The decline in China's demand for commodities also adversely affected the growth of exports and GDP of large commodity-exporting economies such as Australia (minerals) and the Russian Federation (fuel). On the other hand, lower commodity prices led to an improvement in the trade balance—through lower the cost of raw materials and fuels—across commodity importing economies, particularly Cambodia, Kyrgyzstan, Nepal and other remote island nations (Kiribati, Maldives, Micronesia (F.S), Samoa, Tonga, and Tuvalu) which are highly dependent on fuel and agricultural imports.[165]
The oil importing economies like EU, Japan, China or India would benefit, however the oil producing countries would lose.[166][167][168] A Bloomberg article presents results of an analysis by Oxford Economics on the GDP growth of countries as a result of a drop from $84 to $40. It shows the GDP increase between 0.5% to 1.0% for India, USA and China, and a decline of greater than 3.5% from Saudi Arabia and Russia. A stable price of $60 would add 0.5 percentage point to global gross domestic product.
Katina Stefanova has argued that falling oil prices do not imply a recession and a decline in stock prices.[169] Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, had earlier written that that positive impact on consumers and businesses outside of the energy sector, which is a larger portion of the US economy will outweigh the negatives.[170]
While President Trump said in 2018, that the lower price of oil was like a "big Tax Cut for America and the World",[93] The Economist said that rising oil prices had a negative impact on oil-importing countries in terms of international trade.[88] Import prices rise in relation to their exports.[88] The importing country's current account deficits widen because "their exports pay for fewer imports".[88]