Cyclopedia Of Economics 1st edition

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The Price Trends of Oil

The international price of oil is determined by the following factors:

(NEGATIVE=depresses prices, POSITIVE=increases prices)

  1. The weather. Cold weather increases consumption. The world is getting hotter. The 14 hottest years in history have been in the last 25 years. The warmer the climate - the less oil is consumed for heating. NEGATIVE.

  1. Economic growth - The stronger the growth, the more oil is consumed (mostly for industrial purposes). POSITIVE.

  1. Wars increases oil consumption by all parties involved. POSITIVE.

  1. Oil exploration budgets are growing and new contracts have just been signed in the Gulf area (including Iraq). The more exploration, the more reserves are discovered and exploited, thereby increasing the supply side of the oil equation. NEGATIVE.

  1. Lifting of sanction from Iraq, Iran and Libya will increase the supply of oil. NEGATIVE.

  1. Oil reserves throughout the world are at a record high. This tends to depress demand for newly produced oil. NEGATIVE.

  1. The economic crisis of certain oil producers (Russia, Nigeria, Venezuela, Iraq) forces them to sell oil cheaply, sometimes in defiance of the OPEC quotas. NEGATIVE.

  1. OPEC agreements to restrict or increase output and support price levels should be closely scrutinized. OPEC is not reliable and its members are notorious for reneging on their obligations.

  1. Ecological concerns and economic considerations lead to the development of alternative fuels and the enhanced consumption of LNG (gas) and coal, at oil's expense. Even nuclear energy is reviving. NEGATIVE.

  1. New oil exploration technology and productivity gains allow producers to turn a profit even on cheaper oil. So, they are not likely to refrain from selling oil even if its price declines to 5 US dollars a barrel. NEGATIVE.

  1. Privatization and deregulation of oil industries (mainly in Latin America and, much more hesitantly, in the Gulf) increases supply. NEGATIVE.

  1. Hedge funds and other derivatives induced price volatility has increased lately. But financial players have no preference which way he price goes, so they are NEUTRAL.

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