Answer

Oil is a crucial resource all over the world. Primarily, the commodity has a variety of uses that makes it essential for everyone. Since its discovery and commercial use, the rate of using oil, which amounts into its demand has continued to rise. Despite the increasing demand, the price of oil has often remained inconsistent since 1859.

Oil Supply

The supply of oil in the world is becoming less elastic with time due to the increasing number of producers. Primarily, supply is determined by the amount of oil available in reservoirs. Based on the current technologies, it is difficult to determine the exact volume of crude oils. Therefore, estimates are used. According to the Oil and Gas Journal, the estimated volume of oil available in the world in proven reserves as of 2007 was 1.3 trillion barrels (1). However, the amount was expected to rise to 1.7 trillion barrels due to emerging oil wells. In this arrangement, the top leading oil producing and supplying nations are Russia, Saudi Arabia, the united states, Iraq, China, Canada, Iran, UAE, Kuwait, and Venezuela in that order as shown in figure 1 below. Oil supply is also a commercial activity for developing nations such as Nigeria which produces about 2.5 million barrels of oil per day.

Fig. 1.  Leading oil producing nations in the world. CNNMoney data. “World’S Top Oil Producers – Cnnmoney”. Cnnmoney, 2019, https://money.cnn.com/interactive/news/economy/worlds-biggest-oil-producers/index.html.

Demand for Oil

The extensive use of oil culminates into high demand. According to Jadidzadeh, Ali, and Apostolos, the current world demand for oil including biofuels is 99.3 million barrels per each day, and the figure is expected to rise due to growing economies especially in developing nations as indicated in figure 2 below (67).

Fig. 2. Oil demand in the world since 2006. Jadidzadeh, Ali, and Apostolos Serletis. “How does the US natural gas market react to demand and supply shocks in the crude oil market?” Energy Economics 63 (2017): 71

Increasing industrialization efforts in most developing nations have increased demand from these countries for oil (Maxwell 1027). Similarly, China and India are also significant drivers of the increasing demand for oil. As per 2018 statistics, the United States maintained its position as the largest oil consumer followed by China and India while Saudi Arabia and Russia followed suit. Ideally, most demand is experienced in the US and European Union nations which consumes 15,000,000 barrels a day just 4 trillion less of the consumption levels in the US.

Price History

The price of oil keeps varying because it heavily relies on the interaction of demand and supply as indicated in table 1 below. The aspect has led to the formation of some regional groups such as the organization of petroleum exporting countries (OPEC) to help stabilize prices by creating a stable supply to offset market changes in prices associated with supply fluctuations (Al Rousan et al., 31). Ideally, the member states of the organization manage to achieve their target because they produce about 41% of the total oil supplied in the world and collectively, they own about 81% of the world’s total oil reserves.

Table 1.

Prices of crude oil since 1997.

Source. McMahon, Tim. “Historical Oil Prices: Inflationdata.Com”. Inflationdata.Com, 2017, https://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp.

Besides demand and supply forces, other factors that affect the price of oil include exchange rates. Principally, the low the value of currency the high the cost of oil on national markets. Consequently, developing nations are disadvantaged because their struggling economies coupled with instability in their nations makes their currencies to lose value against significant denominations such as the US dollar.

Market Structure

The oil market structure in the world is an oligopoly one. In this structure, significant producers of oil such as Saudi Arabia, Russia, and Iran set market conditions. Therefore, they can dictate demand and supply thereby affecting the price. Even though the United States is a significant producer of oil and is not part of any existing oligopolistic structure such as the OPEC, its supply cannot offset significant market changes (Easterly 28). Moreover, small non-OPEC oil producing nations such as Nigeria do not supply significant quantities to offset market conditions. Furthermore, political instabilities in such nation lead to inconsistency in supply. Primarily, the market structure means that developing nations that produce oil such as Nigeria confound to market set prices. Consequently, their profit margins are determined by high volume supplying nations.

Major Events

Significant events in the oil sector have been either human-made or natural. In this regard, natural factors revolve around environmental elements such as the 2004 hurricane on the south coast of the United States that damaged various crude oil supply structures leading to shortage hence price rise. On the other hand, human made events are mostly political such as the 2002 workers strike in Venezuela that leads to price rise of oil after a worldwide shortage. Primarily, subsidies, price caps, and non-tariff barriers do not significantly affect oil on the international market.

Technological Effect on Production

The increasing use of technology in various areas due to its efficiency-enhancing effect has influenced oil production. Ideally, technology has improved production due to the use of new techniques in drilling. Consequently, it is contributing to a reduction in price as supply increases.