When college economics professors want to explain how supply-and-demand affects prices, an easy lesson is to look at the energy markets.
Early this month, West Texas Intermediate (WTI) crude oil prices were hovering just above $66 per barrel, and many energy-producing companies were trading at or near 52-week highs.
Oil prices were up by over 30% since the middle of last year, but when prices rise, so does production. When supplies go up, prices tend to go back down – and that’s Econ 101.
Fast-forward to today, where oil is now trading at just over $59 per barrel, down 10% from the top. Energy stocks fell along with the price of oil and the overall stock market. It’s really no wonder why energy stocks fell as sharply as they did.
It’s an easy correlation: High oil prices mean that producers make more money, and low prices mean they make less.
Since February 1, U.S. crude oil prices have fallen 10%, so it stands to reason that companies selling oil products have fallen by as much.
Until there’s a cheap and clean energy alternative, oil prices will fluctuate on supply and demand factors like they’ve done for the past century or so.
The Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 by the governments of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since its founding, other oil producing nations have joined OPEC, which advocates for secure fair and stable oil prices for producers. OPEC’s mission is to try and increase profits for members while regulating supply and manipulating prices.
If OPEC sounds like a cartel, it is. The only problem (for it), is that there are major oil-producing nations like the United States and Russia who aren’t members and aren’t subjected to their policies. That means when OPEC decides to implement a cut in production to prop up prices, there are major producers ready to step in when the prices are favorable to produce more.
OPEC still has influence on the world oil markets, but it’s definitely diminished since its start in 1960.
The price of oil fluctuates because demand for oil fluctuates and supply fluctuates. What doesn’t fluctuate much is the cost to produce a barrel of oil. It’s a lot more costly to extract from deepwater wells like in the rough North Sea than from the desert of Saudi Arabia.
According to the Wall Street Journal, the UK had a production cost of nearly $45 per barrel compared to Saudi Arabia’s $8.
Here in the U.S., it costs a little over $23 per barrel to extract oil from shale compared to about $21 for non-shale producers.
It doesn’t take a math whiz to figure out that when prices go up, producers pump more oil to make more money – that is, until supply exceeds demand and prices go back down. Once agin, we’re talking Econ 101.
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