I grew up having to work in the oil field, and you know how having to do something is, especially when you are a teenager.
This "have to", in turn, put me in a place where I watched my parents go from rags to riches and back again. One moment the price of oil would be $100 a barrel and the next $22 a barrel. This did not seem like a great place to be, with all of the ups and downs of the cost of oil. These price fluctuations in turn affect the cost of gas at the pumps. And this is what most U.S. citizens are concerned with. But do you really know what causes these fluctuations?
There are a few reasons; but the oil companies themselves are not one of them.
As when dealing with any GDP (Gross Domestic Product) there is supply and demand. But oil is not a typical commodity. Yes there is supply and demand though. For example the summer months will drive higher demand than the winter months, for obvious reasons. But oil, as I have already stated, is not typical. Oil is traded as future oil on the commodities exchange. Commodities futures, or futures contracts, are an agreement to buy or sell a commodity at a specific date in the future at a specific price.
Sound like guess work? Well it is, because this makes the price fluctuate daily depending on what investors think the price is going to be. It's sort of like fortune telling.
Then we have OPEC (Organization of the Petroleum Exporting Countries) which is a permanent intergovernmental organization consisting of 12 of the major oil producing countries. These countries are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. These countries produce 46 percent of the world's oil.
OPEC was formed in 1960 after these countries realized that they had non renewable resources and if they competed with each other it would drive the price of oil so low that their resource would basically not be so desirable.
OPEC's goal is to keep oil prices at around $70 a barrel. A higher price gives other countries the incentive to drill more; something that OPEC tries to prevent. The United States wards off the control OPEC tries to establish by keeping 700 million barrels of oil in the strategic petroleum reserve, making the U.S. less dependent on OPECs oil.
Speaking of that I am sure you have heard of US dependency on foreign oil. It's actually not the major issue that the politicians would like for us to believe it is. Not only do we have the reserve, we also buy oil from Mexico. We have what is called NAFTA, which is an acronym for a trade agreement that keeps the price of oil low, since it reduces tariffs. (That topic leads into another subject, one we will leave for another time). Now you know where the supply is, let's take a look at the demand.
As everyone should be well aware of, the US is the biggest consumer of oil. We presently use 21 percent of the world's oil. This is partly because we have huge amounts of highways which in turn has resulted in America never conceiving the prospects of an infrastructure for a national mass transit system,
Europe is the next largest user of oil at 15 percent and China is not far behind at 11 percent and rising.
The major contributor to the higher oil prices is OPEC of course. Then you have the oil futures or futures contracts. As stated earlier these are agreements to buy or sale oil at a future date at a future price. Traders bid on oil on what they think the price of oil will be, They look at the supply and demand. If they think the demand will increase because of the economy they will drive the price up. In turn this creates high oil prices even if there is plenty of supply on hand, and that creates what is known as an asset bubble. This happened in the summer of 2011 with gold prices. It happened in the stock market in 2007 and housing in 2006. When the housing bubble burst it lead to the financial crises of 2008.
With all of these facts I still have to stick with my teenage thoughts on the oil industry; "to many ups and downs". One thing I do know is that the oil companies do not have control over the oil or gas prices. They are just the suppliers of a product that can control the world economy.