It can truly be said that oil is the lifeblood of capitalism. Not only do oil products produce the fuels, energy and lubricants that industry needs for physical production, the petrochemical industry produces an enormous range of products from drugs to plastics. The clearest example of the importance of oil is in the production of petrol and diesel, but, of course, oil and gas are widely used in electrical power production and in households for heating.
Like any commodity, the price of crude oil is driven by supply and demand. As with most commodities, traders bid for futures contracts – they are forward buying oil that has yet to be produced – since one thing is certain; the world will continue to need black gold well into the future.
Factors which have an impact on the production and supply of crude oil (or are perceived to do so) will have an impact on its price. When the oil producing nations are pumping more production into the markets, the price will fall (which is why the OPEC cartel tries to regulate production through agreed quotas amongst its members). Political unrest in producing countries or war may choke off supply and will cause prices to rise; as they did this year during the “Arab Spring”.
On the other side of the coin, the world economy needs oil to thrive and survive, but during times of recession or weak economic growth such as we are seeing now, demand dries up and the price weakens. The price for Brent crude oil has slipped from a high of $126 in May to “just” $104 at the end of last week (it started the year at the $94 mark).
Analysts are expecting that the price for oil will soften as the global recovery falters and worries about sovereign debt in Europe (largely) persist. Additionally, as the Gaddafi regime is relegated to history, Libyan oil production will return to the markets, easing the supply side of the equation.