Crude Oil Price Fluctuations between 1998 and 2018

Running head: PRICES AND MARKETS
Crude Oil Price Fluctuations between 1998 and 2018
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1PRICES AND MARKETS
Introduction
Crude oil is one of the most economically important resources of the world. The
economies of many countries are heavily dependent on the production and export of crude oil,
while others need to import the oil for energy production and running the transport and other
industries. According to a report by Majumdar (2016), oil and gas satisfy more than half of the
world’s demand for energies. OPEC, the intergovernmental organization consisting of 14
nations, controls the prices of oil and all the oil trade related activities. The main objective of
OPEC is to supervise and regulate the supply of the oil to the consumers and keeping the market
stabilized (Griffin and Teece 2016).
The price of crude oil has fluctuated significantly in the past two decades. Similar to the
prices of any other consumer good or service, the price of crude oil also depend on the demand
and supply of it. As stated by IMF (2015), if the price elasticities of demand and supply are low,
then the disturbances in either side of the market can lead to sharp fluctuations in the oil price.
During the period between 1998 and 2018, the demand for oil has been affected by negative
revisions of the global economic prospects, while the supply of oil faced disturbances from
armed conflicts, strategic shifts of some parts of the OPEC countries, new discoveries of oil
fields and new extraction technologies.
In this paper, the economic analysis will be done to highlight various aspects of the crude
oil price fluctuations between 1998 and 2018. The reasons for price fluctuations, various aspects
of the exchange process, the pattern or trend of the variations, factors affecting market outcomes
and its impact on the global economy, and if there is a scope for government intervention will be
discussed.

2PRICES AND MARKETS
Economic analysis
Factors influencing crude oil price variations
According to a report in Oil and Gas Financial Journal (Ogfj.com 2017), the major factors for
crude oil price fluctuations are as follows:
 Dynamics of demand and supply: In the period between 2010 and 2014, the rise in oil
prices can be attributed to the supply crunch from the conventional oil production fields.
This resulted in higher income for the upstream organizations and investors. This extra
capital was invested for exploration and development of new and unconventional sources
of energy, like the shale and tight oil. Success in those ventures led to a fall in the
conventional oil prices in 2015 and onwards.
 World economic growth: Since, the demand for oil is dependent on the growth of many
important industries in a nation, such as, electricity, transportation, shipping and
manufacturing, hence, the global growth in the industries resulted in higher demand for
the oil, which has caused the prices to soar high (Sodeyfi and Katircioglu 2016).
 Appreciation of USD: The oil trade is done using the global currency, that is, the USD.
The USD has appreciated significantly during this time, resulting in increasing the cost of
oil imports and decreasing the price of exports.
 OPEC policies: To stabilize the oil market, OPEC has decided to cut down production of
oil, with effect from January 1, 2017 and this is expected to help the price move upward
slightly in 2018.
 Geo-political events: This is an important factor that can affect directly the supply and
distribution of oil across the globe. World crisis in the oil producing countries not only
increase the price of the oil, but such events can also result in loss of output, disruption of