Oil price fluctuations can have outsized effects on companies, economies, and global geopolitics. A spike in prices can stunt economic growth, for example, and a drop in oil prices can blow a hole in the budgets of cash-strapped energy companies or prompt wholesale economic reform seemingly overnight. Moreover, because oil demand is highly inelastic, large changes in price can occur over somewhat short periods. To better understand the magnitude of these price shifts, we present a real oil price series that strips out inflation (Figure 1).
Political instability around the world is a major influence on the price of crude oil as the Middle East accounts for a significant portion of the world’s supply. Political unrest in the region can trigger fears of broader regional instability that may threaten oil production or disrupt global oil supply routes.
Other influences on oil prices include the supply and demand for petroleum products, technological innovations, financial conditions, and natural disasters. The Organization of the Petroleum Exporting Countries, or OPEC, is also a major influence on the price of oil as it sets output levels to balance global demand and supply.
Despite the fact that OPEC no longer fixes oil prices, it continues to influence oil prices through market-based pricing mechanisms. Finally, technological advances such as the fracking revolution have made it possible to extract oil from previously inaccessible shale deposits. This new source of oil has sparked competition in the marketplace and is another reason why the price of oil has risen.