Crude oil is refined into various products such as unleaded fuel, gasoline, kerosene and lubrications. These products are the major sources of energy that drives the world today. At present, about 40 percent of the planet’s demand for energy is met by crude oil related products.
Prices of crude oil are determined in the international commodity market and they are usually influenced by demand and supply conditions, as well as speculation or expectations about the future. Generally, when the world economy is experiencing good growth, demand for energy (crude oil) is higher and hence prices may rise. In times of an economic slowdown, demand weakens, often resulting in a decline in prices. Similarly, if buyers fear disruptions in supply in the future due to events like war, terrorism threats or labour strikes in a major oil-producing nation, they often try to stock-up oil inventories in advance. This causes an unusual increase in demand and leads to a rise in prices.
The Organisation of Petroleum Exporting Countries (OPEC) is mainly responsible for supplying crude oil in the market. About 11 countries are members of OPEC and Saudi Arabia is the largest oil-producing nation, followed by Iran, Venezuela and Iraq. There are other non-OPEC countries like Russia and Canada that supply crude oil. Oil prices are quoted in US dollar per barrel1 – as it appears on television during the evening news bulletin. At present, the OPEC targets a price range between $US22-28 per barrel. In other words, if oil prices are higher than US$28 per barrel for a long time, then OPEC is likely to lift supply of oil to reduce prices. Conversely, if prices are below US$22 per barrel, then it is expected to cutback on supply to push prices upwards.