Business Economics GM545|
There are many factors involve in fluctuated oil price. The first one is the supply of crude oil. Second factor is the U.S demand. These factors play an important role in determining the oil price. Other considerable factors are distribution network, value of U.S dollar and the oil market. However, in the scope of this question, only supply and demand for oil price will be discussed. Nearly 85% changes in gasoline price in U.S come from changes in crude oil price. Currently, main U.S suppliers for crude oil are OPEC countries. These are 12 countries mainly located in the Middle East and Africa area that produces 46% crude oil in the world (Amadeo). The organization was found to regulate the supply, keep the price high and prevent competition between oil exporting countries because if they keep competing with each other, the oil price will go down and oil reserves will go out soon. From the report of Federal Trade Commission, “OPEC still produces a large enough share of world crude oil to exert market power and strongly influence the price of crude oil when OPEC members adhere to their assigned production quotas. Especially when demand surges unexpectedly, as in 2004, OPEC decisions on whether to increase supply to meet demand can have a significant impact on the world crude oil prices” (Federal Trade Commission, 2005) . When the demand increases, OPEC countries can’t increase the quantity supplied because that will make the oil reserves go out soon. In addition, they also have quotes in place. There are, price is raised to lower the demand to the quantity supplied. Demand in oil also explains why gasoline price fluctuates. When demand decreases, gasoline price decreases, just like what happened in 1980s as stated “As gasoline prices began to fall in the 1980s, U.S consumption of gasoline began to rise once again. In 1993, U.S. gasoline consumption...