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Published On: Thu, Sep 26th, 2019

What Drives the Price of Oil? Industry Expert Alexandro Rovirosa Explains

As CEO of Roma Energy Holdings, Alexandro Rovirosa frequently manages client responses to volatile oil prices. While the law of supply and demand (low supply means high demands which in turn means higher prices – and vice versa) is generally a simple concept, a number of international factors that impact supply naturally also cause oil prices to fluctuate.

The fact remains: many of these factors driving supply are simply out of most people’s control, therefore, it is better to try to understand them. At the risk of over-simplifying the nature of oil prices, here are the five main drivers that are affecting the price of oil in North America.

September 2010 photo/Daniel Christensen

How Much Oil is Available?

While Alexandro Rovirosa notes that crude oil supply remains far from scarce across the planet, the greater concern regarding supply relates to the availability of refined oil. Depending on the location of where the oil was originally harvested, it requires a certain amount of refining.

This refining process both adds to the cost of production and extends the timeline in which that consumable oil is available to consumers. For example, cars and planes are well-known to use high amounts of refined oil (gasoline, diesel, etc.). Vehicles and planes cannot take crude oil in its extracted state.

A more recent “problem” with regards to oil supply is this year’s (2019) overproduction. When there is a surplus of refined oil, then prices tend to drop. Conversely, when there is underproduction, then prices escalate.

How Much Oil are Consumers Using?

As with the laws of supply and demand, when demand is high, prices are high. When demand is low, prices are low. For example, after OPEC’s oil embargo against the US in the 1970s, demand for oil increased in the face of scarcity, and as a result, prices skyrocketed.  

What Factors are Influencing Oil Exports?

Oil exports are those which leave one country and are sold to consumers in another country. Exportation often dictates available supply. For a list of the top oil exporting countries, see here. Even though North American countries are among the top producers and exporters, major changes in production among foreign nations can have a drastic effect on fuel prices in the United States. 

For example, many countries experiencing war see a major drop in their ability to export oil to other nations, including nations which may also produce oil of their own. This usually means that oil prices increase around the world.

What Factors are Influencing Oil Imports?

Oil imports are those which bring foreign oil into a country for its consumer citizens. Any changes in trade laws – such as tariffs, geopolitical ramifications, embargos, or sanctions – could mean a significant loss of oil imports, thus driving down supply and increasing demand.

Another effect on oil prices are mere rumors of scarcity. According to Alexandro Rovirosa, panic may grip consumers which may in turn cause them to hoard or over-buy. In many cases, vendors will drive up the price of supply in the face of such rumors.

What Political Factors are Influencing Worldwide Supply/Demand?

How nations behave toward one another typically has a major effect upon oil prices. These factors are also commonly known as Geopolitical Factors associated with oil production around the world. One of the most colorful chapters in the geopolitical effects on oil supply/demand is the formation and history of OPEC.

OPEC

In the 1960s, five of the leading oil-producing nations organized the Organization for Petroleum Exporting Countries (OPEC). These five nations were Iran, Iraq, Kuwait, Syria, and Venezuela. Over time, more nations joined, working much the same way as other international trade organizations. Unfortunately for the United States, many OPEC nations retain ongoing grudges against the US and their allies.

That being said, when the US and/or their allies take political actions which anger one or more OPEC nation, OPEC has been known to impose embargoes that end up lowering supply and raising prices on consumers in the US. 

Alexandro Rovirosa is not only the CEO of Roma Energy, but a longtime veteran of the energy sector. His background in downstream operations (sales and marketing) merges with his skills in law and business development to make notable adjustments in fuel exploration and production. Learn more about Roma Energy.

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