How is the price of oil determined?

 What moves the world? Anyone's answer might be air, water, or food, but to some, it's oil.

Crude oil is a type of fossil fuel, a natural petroleum product consisting of hydrocarbon chains and organic matter, which can be refined to produce a variety of products including gasoline, diesel, and jet fuel. These fuels have been in circulation and consumption since before 1900 and still constitute The lifeblood of the global economy. This title comes with a great responsibility that the price of oil can greatly affect the economies of countries and the global economy.

What is the history of oil?

The history of oil goes back many years. You must be asking: when exactly? The first commercial oil well was drilled in Azerbaijan nearly two centuries ago in 1847. The United States, which is the largest oil producer in the world today, discovered oil about 12 years after the first oil was discovered in Pennsylvania. Initially, the early demand for oil was Very low, but soon after the first mass-produced commercial well was drilled in Texas, producing more than 100,000 barrels of oil in a single day. In the Middle East, oil was first discovered in Iran in the early twentieth century, and shortly thereafter the first large-scale drilling projects began in 1908.

Oil has been and remains an important commodity, given the dependence of the economies of countries on their energy sectors and the increase in consumption over the past century.

The Energy Information Administration (EIA) estimates that global consumption of petroleum and liquid fuels reached 93.4 million barrels per day in July 2020.

What are the supply factors for the price of oil?

In any type of market, there are many different supply factors that can affect the price including the price of oil. Some of the supply factors are the Organization of Petroleum Exporting Countries (OPEC), non-OPEC factors and external supply shocks.

You must have heard of OPEC before, if you haven't, don't worry, that's what we're here for. Here's a quick background: Founded in 1960 at a conference in Baghdad, OPEC is a permanent intergovernmental organization of 13 oil-exporting countries that coordinates and unifies the petroleum policies of its member states. OPEC controls nearly 40% of the world's oil supply, and aims to unify destinations Considering oil production quotas to prevent overproduction and a rapid decline in oil prices, thus ensuring the stability of its prices in international markets. However, nothing is perfect. Shortcomings in OPEC policy persist, including unexpected outages, regional policy pushing for market share, or non-compliance by member states with agreed quotas.

Countries that are not members of OPEC such as the United States can have a significant impact on oil prices. For example, the United States has gone from one of the world's largest energy consumers to one of the world's largest energy producers. And it did not stop there, but is now the largest oil-producing country in the world. The reason for this is largely due to its production of shale oil in the past decade, which has given it a lot of power and authority over oil prices.

Oil prices can be affected by events not directly related to supply, ranging from geopolitical events - such as major weather events - to geopolitical or regional instability. The 1973 Arab oil embargo, also known as the First Oil Shock, sent oil prices up by about 230%. In 2017, OPEC decided to reduce its production, which also sent oil prices up about 7%.

Major weather events not only destroy infrastructure and markets, but can also affect oil prices. A recent example is when Hurricane Katrina hit the United States in 2005, severely damaging the region's oil supply infrastructure, which in turn triggered a supply shock to global markets.

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