Ask Terry Questions Oil Prices

Oil Prices

By Terry Savage on August 02, 2015 | Taxes & Economy

What is the reason a barrel of oil has hovered around $50 for the last year? In the past, OPEC, would control the price buy cutting production to control inventories, right? Are the inventories the reason, or is there another reason?

Thank you.

Terry Says:   There is a global free market in oil — and it is a “fungible” commodity.  That is, no matter where it is drilled (despite variations in sulfur content, etc) oil can pretty much be shipped and used and refined anywhere, based on transportation costs.  There are two benchmark prices for oil — WTI (West Texas) currently trading around $48, and Brent (Northern European) currently trading around $53.  But aside from these regional differences (which at times are reversed, depending on current inventories in each location) the overall price of oil is set by supply and demand.

And since so much new oil (or energy substitutes) have been found since the 1970s when OPEC basically controlled the market, there is much more possibility for substitution and thus OPEC has less control over global prices.   With the current global economic slowdown (led by China) and the huge supplies found in the US by using new drilling (fracking) methods, the balance has changed, and prices are down.

And though you didn’t ask, my favorite after-thought:  When oil prices rise sharply, you can be sure that gasoline at the pump will also rise in price.  But gasoline prices come down much more slowly!!



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