Crude Oil Price Fluctuation in the International Market

This report analyzes the factors that affect the fluctuations of crude oil prices in the global market, including supply and demand, dollar exchange rate, geopolitical instability, and opportunistic practices in futures markets. It also discusses the effects of oil price movements on the welfare of consumers and the economy.

Surname 1
Student’s Name:-
Professor’s Name:-
Course:-
Date:-
Crude Oil Price Fluctuation in the International Market
1. Introduction
The global economy considers oil as one of the significant energy source for the
development of industries. The importance of oil has promoted an increase in the demand of the
commodity by most countries as they endeavor to promote their economies. The key role that oil
plays in the global economy implies that price fluctuations of the resource affect the economy.
The approximate consumption of oil as a source of fuel amounts to over 40% of the world
energy. The commodity however, faces uncertainty in the supply and the international market
prices. Oil crisis began since the 1970s which led to the devastation of the global economy. The
costs of the fossil fuel have been experiencing high rates of price fluctuations especially in the
21st century. The prices for instance, alternated from 49.51 dollars per barrel at the beginning of
the year 2007 to 142.95 dollars per container in July 2008 (King, Kathleen, Ai Deng, and David).
The value declined to a cost of less than 40 dollars for each barrel. There is need therefore to
conduct an analysis of the factors that affect the international prices of oil. This report intends
to discuss the fluctuations of unfinished oil prices in the global market. The report shall describe
different factors that affect the costs of the resource such as demand and supply by the producing
and importing states. Among the factors that this report intends to describe is the imbalance

Surname 2
between supply and demand of crude oil in the market, the effect of the United States dollar
exchange rate, geopolitical instability and the opportunistic trends for the future markets.
Variations in the value of the petroleum commodity in the international market may also
influence the welfare of a certain economy in relation to surpluses of the consumers or producers
of the product. This report also explains the impacts of oil prices on the economy of various
countries.
2. Factors that Led to Oil Price Fluctuations
Imbalance between Supply And Demand of Market
The relationship between the supply and the demand of crude oil in the market has a
direct influence on the prices of the commodity. The existence of a supply-demand imbalance
would as such trigger fluctuations in the international oil prices. There are various factors that
associate with the supply and demand in determining the changes in the costs of petroleum
products.
Crude oil is a non-renewable natural resource and as such, it possesses the limitations in
terms of supply. The product does not occur in large deposits over the last 20 years and the
reserves have not undergone any drastic increase (Lingyu 39). The processes of producing the
crude oil to the relevant markets have undergone a slow increase in relation to the rate of growth
of oil use. The developments in the sectors of exploration, transportation, refining, and marketing
has improved at a sluggish pace to match the demand for the products.
Oil producing and exporting countries take part in a pivotal responsibility in the prices of
crude oil. The OPEC states possess over 75% of the World’s total oil reserves (Arouri et al. 611).

Surname 3
The instability of the oil production of the OPEC would therefore, determine the changes in the
costs of the commodity. The Global oil supply policies and pattern determines the predominant
responsibilities that the OPEC has in the global markets. Quantitative analysis of the
determinants of oil price variations through the principles of co integration and error corrective
model reveal the effects of OPEC oil supply on the costs of the resource. The model suggests
that a 1% rise in the generation of the fossil fuel in the OPEC leads to an approximately 1.23%
decrease in the prices.
The demand of oil is additionally a causative factor in the variations of crude oil. OPEC
has in the recent years promoted economic diversification. Since the 1970’s when oil became
the common source of energy, most countries relied on the petroleum industry as the main
economic sector (Lingyu 39). The countries have promoted the development of non-oil
industries to reduce the dependence on the oil as a domestic gross product. Research reveals
that’s the non-energy industrial level increased from around 273 billion dollars to 608 billion
dollars within the gulf countries.
The diversification of the economy among the OPEC increased the consumption of the
petroleum products within the producing countries. The internal use of oil in OPEC has
developed into essential demand regions. Therefore, the increased economic sectors in the oil
exporting states have developed effects on the demand and supply, which in-turn influence the
changes in the prices of the natural resource.
The variations in the supply and demand of a product would directly alter the cost of the
goods. Economic theory states that an increase in the demand as a basic factor of prices would
imply the rise in the cost of the crude oil globally. Financial crises in the year 2008 led to the fall

Surname 4
in the demand of oil. The drop in the consumption of the product resulted in the sharp decline in
the prices of the resource. Fluctuations in the demand and consumption of petroleum resources
therefore, have been a key factor in the changes of international prices of the commodity.
The Influence of Dollar Exchange Rate Fluctuation
The oil market has been linked to the dollar since the 1974. The transactions in the oil
trade have for several decades been settled in US dollars, and as such, the variations in the dollar
exchange rates have also been affecting the international prices of the petroleum goods. The
fluctuations in the dollar rates have had impacts on the oil regulations in the OPEC and the
consuming nations. The appreciation of the US dollar during some periods of the decades has
been directly leading to the decrease in the cost of oil in the international market. In contrast, the
depreciation of the dollar during some years made the OPEC to raise the exporting costs of the
resource to curb the losses. Previous survey indicates that a 1% increase in the exchange rate of a
dollar reduces the prices of oil by 3.06% over a long period. On the other hand, a 1% rise in the
US dollar exchange rate has led to a drop in the costs of the products by over 1.82% in the long
run (Nouira, Thouraya, and Christophe). The dollar devaluation therefore, has had an essential
role in determining the variations in the global oil prices over the past decades.
Geopolitical Instability
Most of the oil producing and exporting countries lie in the gulf and Arabian regions. The
regions occupy over 65% of the oil reserves. A section of this oil producing regions have been
experiencing stability problems since the 1980s, and as such, affected the supply in the
international market. In the Middle East, Iran has approximately 18.9 billion tons of oil reserves
which represent about 11 % of the total world’s oil deposits (Marija, Josipa, and Daria). The

Surname 5
existence of tension between the state of Iran and the USA due to the nuclear issue over the
decades has been a stability determinant for the international oil market.
The Opportunistic Practices In the Futures Markets
Although supply and demand affects the global oil prices, there exists a certain valuation
formula that the oil producing nations apply while signing the supply contracts. The formula uses
the principle that the cost of petroleum would depend on the opportunistic factors of markets in
the future (Peng et al). Survey in the recent past reveals that the long opportunistic trades in the
NYMEX have been more than the short and as such, led to the rise in the price of the resource.
3. The Effects of Oil Price Movements on the Welfare of Consumers
The economies of various regions such as the USA fluctuate significantly depending on
the source of the variations in the prices of crude oil. High costs of oil that a state imports would
affect the GDP in the oil importing countries (Xiao, and Huang 3298). For instance, the increase
of oil prices reduces the purchasing power of the residents of the importing nations the escalating
costs of refined commodities. Additionally, the production costs also fluctuate.
4. The Effect of Oil Price Fluctuations to the Economy
Crude oil has a significant role on the macroeconomic and microeconomic sectors,
Changes in the costs of oil on companies and households. Over the past decades since the year
1970, the fluctuations in the prices of oil have been affecting the domestic economies of
consuming nations. Prices of commodities have impacts on the demand of the appropriate
goods. The variations in the cost of crude oil in the global market led to a decrease in the demand
of oil among the importing countries (Ydyrys, and Serikbay 134). There are various aspects of

Surname 6
crude oil prices that affected the demand of oil in a certain economy. The discretionary income
effect where some states reallocated their structures of expenditure in preference of other
products due to insufficient funds to use. Secondly, uncertainty has had a consequence on the
demand of the resource. Several consuming states opted to wait for the prices of the petroleum
commodity to reduce and as such, resulting in the drop of the demand of crude oil from the
worldwide market
5. Conclusion
The history of the international price fluctuation of crude oil reveals that the main factors
for the variations include demand and supply. However, there are other determinants which
include the competition between the world’s economic aspects. Despite the focus on economic
aspects of oil price alterations, natural disasters have also contributed significantly to the
problem. The sudden changes in the market value of the resource have in the past indicated
damages to the economy of various countries especially the large oil consumers such as China.
Countries that experience adverse effects of oil cost fluctuations need to develop efficient energy
utilization rates. Enhancing technology and developing alternative sources of energy would
reduce the dependence on petroleum commodities and as such reduce the expenditures on the
importation of the energy resource. An additional strategy to tackle the high prices of oil is for
countries to diversify the sources of energy necessary in driving production of the economy
(Joëts, Marc, and Tovonony Razafindrabe). An oil future plays an important role in influencing
the value of crude oil. The oil importing nations need to formulate ways to promote engage in the
global oil futures and as such, stretch the risks that result from price alterations. Although the
above analysis discusses several factors that influenced the prices of crude oil, the determinants

Surname 7
revolve around the supply and demand aspect of the resource. For instance, geopolitical
instability eventually determines the rate of exploration and supply of the products to the
consumers. Moreover, the opportunistic behavior of the consumers would also determine the
time that certain consumers would import the fossil fuel. In addition to the causes of crude oil
price variations, it is essential to consider the influence that the changes in the value of crude oil
has to the economy. Sudden price fluctuations of the resource trigger certain countries to
reallocate their budget to other sectors of the economy.

Surname 8
Works Cited
Arouri, Mohamed El Hedi, Jamel Jouini, and Duc Khuong Nguyen. "On the impacts of oil price
fluctuations on European equity markets: Volatility spillover and hedging
effectiveness." Energy Economics 34.2 (2012): 611-617.
Joëts, Marc, and Tovonony Razafindrabe. "What is the Welfare Social Cost of Oil
Price?." Energy & the Economy, 37th IAEE International Conference, June 15-18, 2014.
International Association for Energy Economics, 2014.
King, Kathleen, Ai Deng, and David Metz. "An econometric analysis of oil price movements:
the role of political events and economic news, financial trading, and market
fundamentals." Bates White Economic Report 1 (2012): 2012.
Marija Ledenko, M. S., Josipa Velić, and Daria Karasalihović-Sedlar. "Analysis of oil reserves,
production and oil price trends in 1995, 2005, 2015."
Nouira, Ridha, Thouraya Hadj Amor, and Christophe Rault. "Oil price fluctuations and exchange
rate dynamics in the MENA region: Evidence from Non-Causality-in-Variance and
Asymmetric Non-Causality Tests." The Quarterly Review of Economics and
Finance (2018).
Peng, Wei, et al. "Modeling the Joint Dynamic Value at Risk of the Volatility Index, Oil Price,
and Exchange Rate." International Review of Economics & Finance (2018).
Xiao, X., & Huang, J. (2018). Dynamic Connectedness of International Crude Oil Prices: The
Diebold–Yilmaz Approach. Sustainability, 10(9), 3298.

Surname 9
Yan, Lingyu. "Analysis of the international oil price fluctuations and its influencing
factors." American Journal of Industrial and business management 2.2 (2012): 39.
Ydyrys, Serikbay, et al. "Econometric Analysis of Effect of Oil Price Change, Trade Balance and
Other Variables on Inflation." International Journal of Energy Economics and Policy 8.4
(2018): 134-138.

Surname 10