In 2008, oil prices in Springfield MA and other parts of the United States reached their
peak; consumers were paying around $4 per gallon just to put gas in their cars,
and the average price of a barrel of oil reached $145. Then, in 2009, oil
prices crashed to around $69 per barrel. Such fluctuations are not at all
unusual, and they have a number of causes.
Before
understanding oil prices, it is important to understand the typical standards
of measure used by oil markets. There are 42 gallons of oil in a barrel;
roughly one gallon of crude oil can be made into between .47 and .67 gallons of
gasoline, depending on the refiner and
the quality of the oil, as well as on other factors. But although barrel sizes
and contents remain constant, international market prices are subject to
frequent change.
Four major factors
help determine the price of oil: supply, consumption, financial markets, and
government policies. All of these factors work together to cause price booms
and busts.
According to the
economic theory of supply and demand, a high supply of oil means demand is low,
which in turn means that oil prices will also be low; on the other hand, a low
supply increases demand and raises prices. Supply and demand is an important factor
in determining oil prices, and as the world burns through its oil resources,
demand continues to grow and prices continue to rise.
Consumption is also an important factor. In recent years, the U.S. government and environmental activists have begun an initiative to switch to power sources like wind and solar energy; ways to increase fuel efficiency in cars and other forms of transportation is also being explored. As such, oil consumption may decrease with time as reliance on it as a fuel source begins to diminish. However, alternative fuel sources are still being researched and may not be implemented for many years.
Oil prices are also
massively influenced by the way the supply is traded on the financial market.
Speculators invest in oil futures, which
are essentially bets on the prices that oil will likely reach at a later date. In
turn, these investments affect how people think oil should be priced; they also
affect the amount of oil that petroleum companies choose to release to oil
markets.
Government
regulation also heavily impacts oil prices. Regulations were recently put in
place to control sulfur content, which could raise the demand for sweet crude oil (a type of crude oil that contains less
sulfur than other forms). However, this type of oil is less common than others,
which means that oil will become more expensive as companies try to work within
the confines of the new regulations. Furthermore, laws aimed at preventing climate change will most likely raise oil prices even
further. Finally, oil prices could possibly be affected by higher taxes.
Because so many
different factors work together to determine oil prices, it is very difficult
to predict future fluctuations.
