Oil price: frequently asked questions

Oil price: frequently asked questions

Few of us really consider the fluctuations that affect the oil price; we just re-fuel our vehicles when necessary, perhaps grumbling once in a while about rising costs. But the oil price is one of the cornerstones of the entire economy of the western world. Here is what you should really know about how it is determined.

What does OPEC have to do with the oil price?

No doubt you’ve heard OPEC mentioned during news stories about fuel costs. Founded in 1960, OPEC (Organisation of the Petroleum Exporting Countries) consists of 12 oil producing countries. Aside from Venezuela and Ecuador, most of these nations are in North Africa or the Middle East, including Iran, Iraq and Algeria. With a combined population of nearly 400 million, oil is by far the OPEC countries’ main marketable resource.

A common preconception is that OPEC sets the crude oil prices. They certainly did up until the mid 1980s. And they do voluntarily restrain oil production in order to stabilise the oil market to avoid harmful fluctuations in the oil price. But they don’t actually set the price. Because of oil’s stature as a high-demand global commodity, determination of its basic cost is a bit more complicated.

How do supply and demand affect the oil price?

To an extent, as demand for oil increases, prices rise. But the oil price is actually set in the oil futures market, where futures contracts are a binding agreement giving the right to purchase oil, by the barrel, at a predefined price on a predefined date in the future.

Which traders affect the oil price?

Future trading is split between hedgers and speculators. A hedger would be an airline buying oil futures to provide security against rising prices. A speculator is someone who just guesses the oil price direction, without any intention of actually buying.

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