Shift in Oil Prices
Oil is the cornerstone of the energy market because it is both a fuel and a raw material for many essential products. The price of oil per barrel on the global market is $71.86 as of today, down from $81.40 a year ago (Bloomberg, 2024). Based on what we learned, it is evident that the drop in oil prices is due to lower demand, increased supply, or a combination of both.
OPEC Regulations
When it comes to the actual causes of these shifts, there are three possible explanations: geopolitical conflicts, the pandemic, and the Organization of the Petroleum Exporting Countries (OPEC). The latter essentially controls the supply side of the oil market by increasing or decreasing oil production. The larger the oil supply, the lower the overall price, and vice versa; hence, OPEC might have raised its output compared to the past year.
COVID-19
The pandemic can also explain the drop in oil prices, as the world was recovering from its aftermath. The lockdowns and quarantine measures halted many operations, leading to lower oil use and reduced demand. As the global market recovers, so does its need for more energy, leading to greater oil demand and higher prices (Mankiw, 2024). The past year was likely the final year of recovery from the pandemic, and this year, the upward trend for oil demand stabilized or “cooled down.”
War
Wars can also impact the oil market prices, especially if one side imposes sanctions and the other side is a significant oil exporter, such as in the war in Ukraine. Any sanctioning measure introduces disruption to the market, where the supply reduces while the demand remains the same. It is possible that the previous year’s sanctions on Russia reduced supply, which is why the price was higher; however, the market has now stabilized because other exporters met demand.
References
Bloomberg. (2024). Energy.
Mankiw, G. N. (2024). Principles of macroeconomics (10th ed.). Cengage Learning.