The Low-Down on Crude Oil

The Low-Down on Crude Oil

Crude Oil prices are controlled by the Organization of Petroleum Exporting Countries (OPEC), also referred to as the oil cartel, made up of 15 oil producing countries, collaboratively controlling 80% of the world’s proven oil reserves and 61% of its exports. The organisation was originally founded by Iraq, Iran, Kuwait, Saudi Arabia and Venezuela who each signed an agreement in 1960 to unify petroleum policies and stabilize the oil market, ensuring that consumers are constantly supplied and producers have a steady and fair return on investments.

Crude oil is refined to make jet fuel and gasoline which accounts for 96% of the world’s transportation. When the price of crude oil is high, the price of natural gas is also high which is used to fuel 73% of residential and commercial production. Higher prices mean higher fuel costs and an increase in inflation since food prices are also determined by transportation costs.

On the opposite end though, low crude oil prices can destabilize countries that heavily depend on exporting their crude oil production, incurring large budget deficits and high unemployment rates.Once income from crude oil, also known as petrodollars, are flowing, it can boost government expenditure and generate investments, thus stabilizing the economy and creating a positive flow in equity markets and oil stocks, globally.

All things being equal, the cheaper the production, the cheaper the price to consumers. Technically, this is not the case with crude oil. While production can cost as low as $10 a barrel, there is the added cost of refining it and distribution is also a factor. For instance, in the United States, refineries operate at 62% and since the great depression of 2009, there are 9 less refineries today, accounting for the decrease in oil distribution.

The demand for oil will be high for the foreseeable future and high oil prices mean increased employment. Lowering oil prices would be unconventional, even causing countries like the United States to suffer in terms of growth. The price of oil today is at $73 per barrel and it is forecasted to increase over the next few years. In 2008, it crossed over $100 a barrel but fell to an all-time low in January of 2009 to $59 a barrel. It picked up again in 2011 but it was cut by almost 50% in 2015 when US increased production of shale oil, the alternative to crude oil.

This fluctuation of oil prices should put oil producing countries into perspective, and more research and development should be done on alternative forms and renewable energy. Oil reserves are non-renewable and are being depleted at increasingly fast rates. Finding other forms of income to keep economies stable are imperative to developing nations. High rates of unemployment lead to increased crime rates and an increase in poverty. The price of crude oil affects everyone, individuals and nations alike, but the higher the price of a barrel, the better it is for growth and development of a country, which will trickle down to benefit its citizens.