The price of oil seems to ebb and flow on a dime. That’s why so many people are interested in learning more about what drives this phenomenon.
Oil is a commodity, and commodities are raw materials that are traded through legal agreements known as futures contracts. They tend to be more volatile than other investments like stocks and bonds, because they are less liquid.
Several factors affect the price of oil, including supply and demand, world economic activity, political instability in oil-producing countries, and the weather. The Organization of Petroleum Exporting Countries, or OPEC, is the biggest influencer in crude oil prices. This group is comprised of Algeria, Angola, Congo, Ecuador, Gabon, Iran, Kuwait, Libya, Nigeria, Saudi Arabia, Venezuela, and the United Arab Emirates. These nations produce almost 50% of the world’s oil and hold an astounding 80% of its reserves.
In addition, natural disasters and political turmoil can cause an immediate increase or decrease in the price of oil. Hurricane Katrina, for example, took out 20% of the US oil supply and caused a barrel to rise by about $14.
Despite these external forces, the U.S economy is a relatively resilient one when it comes to oil prices. This is because the nation’s economy is incredibly diverse. While a loss of growth in one sector can depress the overall economy, other sectors—like manufacturing and agriculture—pick up more than they lose. Furthermore, a dip in the price of oil is typically accompanied by a slowdown in global economic growth, further cushioning the impact on other sectors.