Like any other commodities, fuel and oil prices are most affected by supply and demand. While demand can be relatively easier to anticipate, factors that affect supply can change dramatically in a short period of time:
What are the factors that affect the supply of fuel and oil?
Production
As new technologies allow access to previously inaccessible deposits of oil and natural gas, supply is increased. An example of this is the refinement of hydraulic fracturing, or "fracking" techniques, which use pressurized water and chemicals to break through shale deposits and collect previously untapped resources of oil and natural gas.
While hydraulic fracturing has enabled countries such as the United States to boost oil and gas production, its detractors are pointing to its environmental impact. If legislation is passed to limit its use, the cost of fuel and oil could rise as supply is reduced.
Political instability
Because many of the the major oil producing countries are located in areas of the world that experience political and social unrest, threats to oil production and supply can cause volatility in market prices for fuel and oil.
Even speculation of possible disruption of supply can increase the market price for oil. Unfortunately for businesses and consumers, the prices don't adjust downward as quickly when a crisis is stabilized.
Production cuts for price control
When supply of oil far outstrips demand, major oil producers may join together to cut production in order to keep prices at a profitable level. This may create shortages and cause local economies to suffer, as consumers and businesses are required to pay more for fuel and oil, leaving less money for the purchase of consumer goods.
Production may also be kept at their normal levels in order to create a huge surplus in world supply. This would lower production prices to the point of unprofitability for fledgling oil producers, while larger established producers with huge cash reserves can weather the temporary losses. This will allow the major oil producers to maintain their monopoly on supply.
What are the factors that affect demand for fuel and oil?
The primary driver of demand is local and world economies. When economies are booming, demand increases. This can lead to political turmoil as rising manufacturing economies compete with countries with established economies for a limited supply of oil. It can also cause prices to rise if demand begins to exceed supply.
Seasonal conditions may also affect fuel and oil prices, as demand for heating oil in the winter and gasoline in the summer force fuel companies to switch refining processes to meet seasonal demands.
Extremely cold weather may also increase demand for heating oil beyond fuel companies' projected needs, which may cause prices to rise as processing costs for additional heating oil escalate to meet demand.
As alternatives to fossil fuels increase in efficiency and popularity, the world may not be as dependent on oil and gas. However, as emerging manufacturing economies pursue their own Industrial Revolutions to lift their countries out of poverty, and established countries attempt to maintain their energy-driven lifestyles, everyone must try to produce and consume fossil fuels in the most efficient manner possible.
Contact a company such as Small & Sons Oil Dist Co to learn more if you have other questions.
Share12 August 2015
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