Crude oil prices are mainly determined by three factors-Supply, Demand and Geopolitcs. Theoretically, oil prices should be a function of supply and demand. When supply and demand increase, prices should drop and vice versa. However, oil’s status as the preferred source of energy has complicated its pricing. The process of fixing the price of oil goes beyond simple market rules of demand and supply, although the market is the sole decider of the oil price at its most primary level. Demand and supply are just part of the complex equation that has generous elements of geopolitics and environmental concerns.
The United States controlled oil prices for a majority of the previous century. However, America’s reliance on imported oil increased during the Vietnam war and the economic boom period of the 1950s and 1960s, which in turn allowed the Arab countries and OPEC which had just established to influence oil prices. Later, for several decades, the Organization of Petroleum Exporting Countries (OPEC) has been controlling the oil markets, with its oil-producing member nations working together to determine prices by boosting or reducing crude oil production. Several world events such as the fall of Soviet Union and the Asian Financial Crisis, have helped OPEC to maintain a constant rate of oil production.
However, OPEC’s grip on the market has loosened in recent years with the discovery of shale oil in the USA and development in fracking technologies, America has re-emerged as a top producer of oil. However, recent developments have tended to transfer some of the pricing power back to the United States and western oil companies, prompting OPEC to join an alliance with Russia to form OPEC+. Combined, they control over 50% of global oil supplies and 90% of proven oil reserves.
While the United States is the largest producer of oil, it is also one of the largest consumers of oil, restricting the power of OPEC to control oil prices. When oil prices rise, U.S. oil producers extract more oil to capture higher profits. There will also be less demand for OPEC oil in the U.S. with increased production at home. But if the question arises as to who controls prices, it is important to note that the OPEC members are still top exporters in the world and therefore remains a key player in the oil price determination process. As of 2019, OPEC controlled roughly 75% of the world’s total crude oil output.
