As the world reels from the staggering figures on human loss and economic damage caused by the COVID-19 pandemic, one number has captured global attention–the price of oil. An increase or decrease in the price of oil can have far-reaching effects on companies, economies, and global geopolitics. An oil price spike can stunt economic growth, blow holes in government budgets, and prompt wholesale economic reform or shift national priorities seemingly overnight.
While market forces can influence the price of a commodity like oil, a large percentage of price fluctuations are driven by the Organization of the Petroleum Exporting Countries (OPEC). OPEC is a consortium of 12 countries that controls 79.5% of the world’s oil reserves and sets production quotas to balance supply with demand. It has the ability to change prices dramatically, as it did in the spring of 2020 when it cut production and oil prices plummeted in response to the sudden drop in travel and strained crude oil storage capacity as a result of public health restrictions.
Other factors can also drive price changes, including financial conditions, technological innovations, and the direction of interest rates. For example, advances in hydraulic fracturing technology (better known as fracking) have allowed the U.S. to become a major producer of oil by unlocking the shale deposits beneath the earth’s surface. The cost of extraction is another factor that influences oil prices, as is the geographic distribution of oil resources and its transportation costs to markets.
