Q:

Why does the price for a barrel of oil change so often?

A:

Quick Answer

Many factors affect the price of oil, but the two most powerful forces that cause frequent price changes are the simplest: supply and demand. Changes in output by oil-producing countries and problems in the shipping and refining pipeline can affect supply, while the economic health of the world affects demand.

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Full Answer

Since there is significant lag time between when a barrel of oil comes out of the ground and when it reaches the market, the amount of oil available to meet demand levels can fluctuate significantly. Producers want to mediate their output in order to keep prices high, so when demand spikes suddenly, it can take suppliers time to catch up. This imbalance results in a sudden increase in prices. Likewise, if producers put too much oil on the market and demand slows down, the price can decrease sharply. Commodity trading in oil can also affect the price as traders buy oil futures and try to make a profit on their contracts.

Oil and gas prices do not always reflect one another since gasoline is several steps removed from crude oil in the production process. For instance, if a hurricane strikes a region with many refineries, it can sharply reduce a country's capacity for turning oil into gas. This results in less gasoline available on the market, driving the price up, even if there is abundant crude oil available.

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