What factors influence the price of oil?

The price of oil continues to rise. It appears that factors other than supply and demand are involved. Please outline these factors and indicate their relative significance.

One Response to “What factors influence the price of oil?”

  1. Shailesh Poojari Says:

    Determining fuel prices

    Consumers worldwide have watched the cost of petroleum (motor fuels) continue to fluctuate throughout the year. This raises the question, "Why do petrol prices rise and fall?"

    In the long term, the greatest single factor influencing petroleum prices is the cost of crude oil. However, marketplace forces of supply, demand and competition can have a significant effect on the price of petroleum in the short term.

    The Cost of Crude

    Crude oil prices have risen dramatically over the last year, driven by strong global demand, limited spare oil production capacity, and continuing political instability in certain oil producing regions.

    Since the price of crude oil has the most significant long-term impact on the average price of petroleum, contributing over 50 percent to the retail price, it is not surprising to see average petroleum prices significantly higher as well.

    Increase in International Energy Demand

    Surging crude oil demand is being fueled by strong economic growth, particularly in the United States and Asia. The U.S. Energy Information Administration estimates that global crude oil demand will grow 2.5 percent in 2005, reaching 84.7 million barrels per day. Available spare oil production capacity is currently about one percent of total worldwide demand, leaving very little room to compensate for unanticipated supply disruptions or spikes in demand. The tenuous balance between supply and demand is even more of a concern when you consider that most of the world’s oil is located in some of the more politically unstable parts of the world. As such, supply disruptions, whether real or perceived, can have dramatic effects on the price of crude oil.

    Global economic expansion is driving what the U.S. International Energy Agency (IEA) says is the biggest increase in oil demand in 24 years. In particular, industrialised countries such as the US and Asia have had a demand surge.

    China’s rapidly expanding economy has created a huge demand boost and US demand has risen because of its strengthening economic recovery and greater need for higher grade crude oil suitable for processing into petrol (gasoline) for SUVs, which are popular with US drivers.

    Oil Supply – Uncertainty is Placing Pressure on Price

    Crude oil is refined to produce petrol and diesel and the cost of crude oil is traditionally the greatest single factor affecting fuel prices over time. However, with the shortage of refineries to refine the crude we are in a unique situation where the price difference between crude oil and refined product can be large.

    Supply remains volatile. A number of other factors also increase uncertainty of supply and with rising demand, this is placing tremendous pressure on pricing. Political volatility in oil producing regions has historically impacted on crude oil prices and the political situation in the Middle East is of global concern.

    Taxation

    Taxes takes up a significant component of the price in a litre of fuel, but it varies from product to product, and country to country. Tax rates can be as high as 50 per cent of the cost of fuel in countries that Caltex operates in.

    Country Tax % of pump price
    for a litre of petrol Tax % of pump price
    for a litre of diesel
    Cambodia 35% 18%
    Hong Kong 57% 21%
    New Zealand 50% 12%
    Philippines 23% 15%
    Singapore 29% 5%
    Thailand 32% 21%
    South Africa 26.3% 23.3%

    Other Factors That Influence Petroleum Prices

    Although the cost of crude oil has the most impact on average petroleum prices in the long term, local market conditions, which include the forces of supply, demand, competition, and government regulation, can also have a significant impact on petroleum prices, and explain some of the variations in petroleum prices across different markets.

    In any market situation, supply and demand imbalances can affect prices in the short term. Supply shortages typically cause upward price pressure, and can result from an unplanned refinery outage, pipeline problems, or an unforeseen increase in demand. Conversely, length of supply, where supply exceeds demand, can result in downward price pressure. For example, last year on the West Coast of the USA, average petroleum prices actually dropped while crude oil prices were rising. This occurred because higher petroleum prices attracted more petroleum imports, which resulted in higher inventories and greater supply, while demand was softening with the end of the summer driving season.

    Other factors affecting pricing include foreign exchange, geographic location and local competition.

    Competition, reflected by the number of choices in the market place, can also affect pricing. Almost everyone has experienced the difference in petroleum prices between a lone station on a lengthy interstate and in town, where many intersections may have two or three service stations to choose from.

    Generally, price adjustments in the market affect short-term supply-demand imbalances and bring supply and demand back into balance. Whether in a situation of supply tightness or length, price will eventually bring the supply-demand balance into equilibrium by attracting additional supply or influencing demand.

    The Future

    No one can say with certainty what will happen in the future with crude oil and petroleum prices. Caltex, as a Chevron brand, supports a comprehensive national energy policy that would address both conservation (reducing demand) and increasing the supply of crude oil and refined products. This includes streamlined permitting for petroleum infrastructure, as well as increasing domestic crude oil production in an environmentally responsible manner. Caltex is committed to taking all appropriate steps to supply our customers reliably and safely with the motor fuel products they want.

    Pricesfor petrol are determined by global supply and demand and the market decides the price. Caltex will continue to monitor the situation closely and will adjust the prices accordingly in the direction of the market. Caltex is aware of customers’ concerns on price sensitivity and we will always strive to price products competitively.