Crude oil is one of the most valuable commodities and an extremely important source of energy in the world today. Economic development is considerably dependent on energy and as being one of the most important energy sources, crude oil is an important determinant of growth and development. Crude oil has wide-ranging applications- as a fuel for motor vehicles and airplanes, as a fuel for machines in agriculture and industries, for lighting and heating, component of farm fertilizers, plastics, waxes and so on.
Since crude oil serves so many important functions in an economy, its demand and supply draw natural interest from policymakers and the factors affecting the demand and supply. By gaining an understanding of such factors, policymakers can draft appropriate policies to ensure unbridled development. This essay attempts to look at the factors that can affect the global demand and supply of the crude oil.
Economic activity: Economic activity can be a very important factor in determining the demand for crude oil. The demand for crude oil increases when there is an increase in economic activity. Greater demand for crude oil with higher level of economic activity can be on account of industries demanding more crude oil products for their machineries, more vehicles purchased in the economy, increased use of air transport higher household gas consumption etc. A significant portion of global demand is contributed by developed economies. Since these countries are rich, their per capita usage is very high on account of large number of motor vehicles, reliance of households on private motor vehicles, large industrial base and high consumption of petrochemicals etc. Demand for crude oil is rapidly growing from some rapidly developing countries like China and India. Their huge populations are also a reason for rapid spurt in oil demand. Oil demand from rapidly developing countries increases as they become more industrialized and urbanized. As they traverse up the income ladder, their populations start consuming energy intensive products more, resulting in higher demand for crude oil too (“Ten factors that affect,” 2012).
Slowdown or decrease in economic activity can have an adverse impact on demand for oil as illustrated by decreased crude oil demand resulting from slow growth of world economy due to slow recovery in Europe and USA (Hamilton, 2015).
Government policies: Governments often draft policies that influence the demand for crude oil. Policies like taxes on fuels and taxes on motor vehicles cab restrict domestic and global demand for oil. For example, Singapore levies as much as 100% tax on cars and requires obtaining certificate of entitlement to buy a car (Dutta, 2015). In UK, tax contributed over 67% of the per unit price of oil in 2015 (Organization of the Petroleum Exporting Countries [OPEC], n.d.). Developing countries such as China and India provided massive subsidies on oil, buoying the demand (Izzard et al, 2010).
Awareness for sustainability: Several countries are attempting to reduce their carbon footprint following heightened concerns regarding climate change. Orientation of transport policy towards sustainability is one facet of the multi-pronged policy. Brazil has introduced hybrid buses. It also meets significant percentage of its transport fuel need through biofuel. South Korea expanded its network of buses and metro, introduced transit centres and last mile connectivity in order to discourage private car usage (Lee et al, 2015). Such measures can slow growth of demand for oil in the long term.
Weather: Demand for oil is also affected by changes in weather. People drive more in summers leading to a higher oil demand (“Ten factors that affect,” 2012).
OPEC: OPEC is an organization of major oil producing countries. Its members coordinate their oil production decisions. OPEC’s decision to change/export oil production can have drastic impacts on global oil supply. For example, during the Arab-Israeli war in 1973, Islamic nations cut production and imposed embargo on export to some nations, causing oil prices to soar (Macalister, 2011).
American production of oil: Supply of crude oil production can also be affected by oil production of USA as the country has proven huge reserves of oil. US was the largest petroleum producer in 2015 (“Total Petroleum and Other,” 2015).
Crude Oil demand: Fluctuations in demand for crude oil can have a bearing on oil supply as producers may cut back production. OPEC cut back its production in 1980s to prevent oil prices from dropping further following reduced demand (Project Gutenberg Self-Publishing Press, n.d.).
Technological factors: Technological improvements in exploration and production have helped to increase oil supply while most refineries use old technology and do not employ the most recent technology, resulting in lesser efficiency and output (Izzard et al, 2010).
Weather: Severe weather events can impact production of oil. Hurricanes Katrina and Rita adversely affected the oil supply in 2005 by disrupting oil rigs in Gulf of Mexico (ibid.).
Geopolitical factors: Political factors have an important bearing on supply of crude oil, especially those related to major oil producing countries. For example, Saudi Arabia has been maintaining a high supply of crude oil in order to keep oil prices artificially low, so as to economically weaken its rival Iran, another oil exporting nation (Kemp, 2016).
Demand for crude oil is significantly affected by the level and growth of economic activity. Greater economic activity increases demand for crude oil. Demand can also be affected by taxes and subsidies. Increased concerns for environment and calls for sustainability are leading countries to switch to or prepare roadmap for cleaner energy alternatives. This will decrease demand in the long term. Weather can also cause temporary fluctuations in demand for crude oil.
Supply of crude oil can affected by the production decisions and capacities of the OPEC members and USA since these are the major producers. Geopolitical and natural factors that affect these countries can also affect the supply. State of technology and demand for crude oil are also important determinants of the supply.
Izzard, C., Stringer, K., & Foran, J. (2010). Review of issues affecting the price of crude oil. Natural Resource Canada, Petroleum Resources Branch Energy Sector.
Ten Factors That Affect the Price of Oil. 30 April, 2012. Retrieved from https://c1wsolutions.wordpress.com/2012/04/30/factors-affect-price-of-oil/
Hamilton, J. (2015, January 11). Demand Factors in the collapse of Oil Prices. Retrieved from https://c1wsolutions.wordpress.com/2012/04/30/factors-affect-price-of-oil/
Dutta, S. (2015, August 25). 10 Most Expensive Countries to Buy and Own a Car in the World. Retrieved from https://www.insidermonkey.com/blog/10-most-expensive-countries-to-buy-and-own-a-car-in-the-world-367288/
Organization of the Petroleum Exporting Countries. (n.d.) Who got what from a litre of oil in 2015. Retrieved from https://www.opec.org/opec_web/en/data_graphs/333.htm
Lee C., Sung N. M., & Choi S. D. (2015, April 28). Korea’s Leap Forward in Green Transport. Retrieved from https://www.worldbank.org/en/topic/transport/brief/koreas-leap-forward-in-green-transport
Macalister, T. (2011, March 3) Background: What caused the 1970s oil price shock? Retrieved from https://www.theguardian.com/environment/2011/mar/03/1970s-oil-price-shock
1986 Oil Price Collapse. Project Gutenberg Self- Publishing Press. Retrieved from https://www.gutenberg.us/articles/1986_oil_price_collapse
Total Petroleum and Other Liquids Production – 2015. Retrieved from https://www.eia.gov/beta/international/index.cfm
Kemp, J. (2016, April 18) Saudi Arabia turns Oil Weapon on Iran. Retrieved from https://www.reuters.com/article/us-oil-meeting-kemp-idUSKCN0XF2AR
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