Oil price fluctuation is a major concern for global economies and investors. Persistently low oil prices can undermine monetary policy, risking further inroads into unanchored inflation expectations, and make it difficult for countries to manage deficits. At the same time, high oil prices can impede economic growth and harm consumer welfare. Thus, understanding the drivers of Oil price fluctuations is crucial.
One of the main reasons for the volatility of Oil prices is the low responsiveness, or inelasticity, of supply and demand to price changes in the short term. Both oil production capacity and equipment that uses petroleum products as a primary energy source are relatively fixed in the near term, meaning that switching to other fuels or improving equipment efficiency takes time.
Other important drivers of Oil prices are events that may disrupt the flow of crude oil and other petroleum products to market, such as geopolitical developments or severe weather conditions. These events can lead to actual disruptions of the supply chain or create uncertainty about future supply or demand, both of which can increase oil price volatility.
Finally, rising production costs can also drive Oil prices higher. For example, the cost of mining unconventional Oil, such as that found in Canada’s tar sands, is significantly higher than the cost of producing conventional oil. This difference can push the price of a barrel up, especially when consumers respond with demand shocks.