Q:

How is the price of oil determined?

A:

Quick Answer

The price of oil depends on four factors: supply, consumption, financial markets, and government policies. These factors work together to define the price of oil at a given time.

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How is the price of oil determined?
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Full Answer

If the price of oil was exclusively determined by supply and consumption, determining the cost would be quite simple. When the international demand for oil was low, and there was plenty of oil available, the price would also be low. If the demand was high and the supply was limited, the cost of oil would be considerably higher. However, other factors significantly influence this simple equation and skew the figures.

Financial markets impact the price of oil due to speculators. These people invest in oil based on what they expect the price to be in the future. If they think the price of oil is likely to increase, this will encourage those setting the price to put it at a higher cost. The same mechanism works to decrease the price if they expect it to be less expensive in the future.

Finally, governments around the world place a variety of regulations on oil, its production and sale. Specifically, regulations related to sulfur content and climate change have the potential to increase the price of oil around the world.

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