Essay Sample on Crude Oil: Essential to World Economy & Fluctuating in Price

Introduction

Every year that passes, crude oil continues to play a more significant part in the world economy. Ideally, crude oil is the primary source of fuel in the world. Its continued use in fuels has rendered it a high demand commodity in every country. Crude oil, therefore, is good and tends to experience enormous fluctuations in price in comparison with other investments such as bonds and stocks. These fluctuations are due to several influences on the crude oil market, such as the laws of supply and demand, output decisions by OPEC, natural disasters and costs of production. Furthermore, crude oil ever-rising demand as a global commodity increases the chances that considerable fluctuations in price can significantly impact the global economy. In essence, this paper will seek to evaluate and analyses changes in crude oil prices in 2019.

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OPEC, the cartel in the crude oil industry, output decisions have influenced the world crude oil prices in 2019. Since these organizations control over 40% of the global oil supply. As such, OPEC sets the levels of oil production to meet the global demand influencing the price of gas and oil by raising or reducing production (Fesharaki and Isaak, 2019). In 2019, OPEC has cut its forecast for oil demand growth for three months in a low since September. They are citing weaker than expected data in developed economies in America and the Asia Pacific region. The move is to impose a production cut and affect the commodity price. In its monthly report, the group trimmed the rest of the year forecast of global demand to 0.98Million barrels per day, which is down to 40000 b/d from its September estimate. As such, according to WTI, oil prices have fluctuated from a peak of $66.30 per barrel to a low of $56.80 and an average price of $56.81 in 2019 amid speculations of increasing supply and decreasing demand.

Moreover, this is the same situation that led to a considerable fall in oil prices from mid-2014 to 2016. At the beginning of this year, OPEC and other allied producers agreed to decrease output by 1.2million b/d to stabilize the prices. In July 2019, the group continued to cut production, which will continue up to March 2020. As such, OPEC is an oligopoly market where a few oil-producing nations come together collude and supply oil with each other permission influencing price in the process.

The laws of demand and supply influence the prices of crude oil. When the amount supplied is more than demand, the costs of the commodity decreases and vice versa. The 2019 fall in the price of crude oil is attributed to the increased supply and stockpile of the commodity. The demand for crude oil has been on the rise since the beginning of 2019, but the excess amount of oil has led to prices falling sharply. As such, the world demand for crude oil remains steady even though the pace of the growth is reducing. For instance, India's growth remains robust, while China's growth slows. According to the International Energy Agency (IEA) report, supply outpaced demand throughout 2019.

Nevertheless, in 2019 prices of oil have fluctuated, and as of September 2019, they were valued at $54 per barrel. This is attributed to the diversity in supply spearheaded by the US through its Shale oil, which has become a significant exporter of crude oil in less than a decade. It is joined by countries such as Guyana, Iraq, Brazil, Norway, and the UAE as the largest sources of the growth in crude oil supply (Bernake, 2016, 1). Most of these countries are not in OPEC. The demand and supply curve shows that both the quantity supplied and demanded increased in 2019. However, the amount supplied recorded a sharp increase as compared to the quantity supplied, thus, demand exceeded supply leading to low price per barrel of crude oil. According to figure 1, a unit increase in price increases the amount supplied therefore oil supply is price elastic. On the other hand, an increase in a unit price impacts less on the quantity demanded as such quantity demanded is becoming less price elastic.

Figure 1: Demand and supply curve.

Interest rates impact oil prices. While demand and supply influence the prices of oil, it is an oil future that determines the price. A futures contract is an agreement between the buyer and the seller that gives them the right to buy a barrel of oil at a predetermined price in the future (Fantazzini, 2014, 11). As the contract indicates, the seller and the buyer are required to complete the deal on a specific date. As such, the ability of a buyer to bid this future contract is influenced by the current interest rates. When the level of interest is low consumers can borrow and spend money more freely, in the process, driving up the demand for oil. The higher the use of the fuel, the more consumers bid up the price.

Furthermore, increasing the interest rate strengthens the dollar against other currencies. As such, American oil organizations can purchase more for every dollar used. They are, therefore, increasing the supply of oil in the American economy. As a result, the consumer can save some money for the fuel they use. Likewise, when the dollar value is low to other countries, the oil companies only manage to buy less oil, therefore, contributing to oil being costlier in the US. In 2019 the US dollar performance against a basket of other currencies was on the rise. According to the United States dollar index, the dollar performed poorly in January 2019 at 95.2 while performed highest in October at 99.40, and currently stands at 97.742. This explains the fall in prices of oil in the United States.

Conclusion

In conclusion, the paper analyzed and evaluated the change in crude oil prices in 2019. The fluctuations are a result of decisions by OPEC, laws of demand and supply, interest rates and the better performance of the dollar throughout the year against other currencies.

References

Bernanke, B., 2016. The relationship between stocks and oil prices. Ben Bernanke's Blog on Brookings posted on February, 19(2016).

Fantazzini, D. and Fomichev, N., 2014. Forecasting the real price of oil using online search data. International Journal of Computational Economics and Econometrics, 4(1-2), pp.4-31.

Fesharaki, F. and Isaak, D., 2019. OPEC, the Gulf, and the world petroleum market: a study in government policy and downstream operations. Routledge.