Factors That Affect Oil Price The world's developed nations depend on oil to fuel their economic lives

oil well at dusk image by Calin Tatu from Fotolia.com Oil powers the world's developed nations and their economies. Many factors and events can influence the price of oil, such as international political unrest or natural disasters. Other oil price influencers, like drilling bans, have nothing to do with the availability of the commodity itself, but rather the international oil market's interpretation of their potential long-term economic effects. Supply In times of rising oil supplies, oil is often stored to keep it from depressing prices oil tank image by Arman Zhenikeyev from Fotolia.com No one can state with certainty how much undiscovered oil exists on the planet. When a new major oil discovery is announced, it forecasts an increased supply. Any time supples of commodity rise and demand remains relatively flat, prices decline. Conversely, if international oil supplies decline due to production cuts while oil demand remains flat, prices rise. Demand During periods of robust global economic activity, the demand for oil rises. This is particularly true if no new oil discovies are announced that would help offset that increased demand. In emerging markets such as China and India, their increased wealth and the corresponding growth of their domestic automobile fleets put increased pressure on oil prices. A report by Congressional Research Service states that as China and India will import larger amounts of oil as their economies grow, increasing worldwide demand. Restrictive Legislation If a nation announces that it is curtailing or banning oil exploration in an area known to have large confirmed oil deposits, such as the Gulf of Mexico, commodity markets price the "loss" of this potential new crude oil production into current oil prices. According to a report by the U.S. Energy Information Administration, the Gulf of Mexico accounts for 30 percent of domestic oil production. Legislation curtailing Gulf oil production would impact future oil supplies and drive oil prices higher. Political Unrest If an oil-rich part of the world such as the Middle East experiences political upheaval, oil futures markets react by bidding up the price of oil futures contracts to ensure that supplies are still available to the highest bidder. In this example, the perceived loss of oil is enough to drive oil prices higher, even if oil production remains constant. Declining Production During the first half of the 20th century, the United States was the world's leading oil producer and exporter. As domestic production of oil has begun to fall, the United States must import increasingly larger amounts of oil to fuel our economy. This places additional pressure on supplies and generally leads to higher oil prices.

Natural Disasters Damage to offshore oil rigs caused by Hurricane Katrina caused oil prices to rise hurricane image by cherry from Fotolia.com In 2005, when Hurricane Katrina struck the oil platforms in the Gulf of Mexico, there was an immediate spike in the world price for oil. When these oil supplies were temporarily taken off the market from damage by Katrina, oil prices began to increase rapidly. Speculative Buying Oil prices are also influenced through the speculative buying of commodities traders. In 2008, the price of oil reached $140 per barrel. Conjecture centered on the idea that speculators were bidding up oil prices and creating a "bubble", an unsustainable price level. By late 2009, oil prices had fallen by more than 70 percent into the $30 per barrel range because the demand was not present to support the inflated price level oil had attained.

A review of the seven-year oil price trend shows that annual peaks usually appear in the summer and autumn, when demand runs high and hurricanes frequently occur; while spring is a period of adjustment. Judging from current conditions, it is difficult for international oil prices to drop back heavily as long as there is no fundamental change in the basic factors affecting price. On the other hand, there is also little opportunity for prices to surge again, unless a major geopolitical event was to occur.

What Affects Oil Prices? OPEC and Global Oil Supply and Demand Oil prices are driven by global changes in supply and demand along with a number of other geopolitical factors. Worldwide oil production is controlled by OPEC the Organization of the Petroleum Exporting Countries, which aims to keep a stable priceper-barrel for crude oil. OPECs goal over the past decade has been to keep the price of oil around $30/barrel however major global events have made this task increasingly difficult over time. Hurricane Katrina and Oil Prices Wars, recessions, and devastating weather are the main external factors that can affect oil prices. In 2005 Hurricane Katrina halted oil production along the Southern Gulf Coast of the United States. As supply was precipitously cut, and demand remained the same, oil prices increased to over $70 a barrel in a short period of time. As prices at the pump peaked, President Bush released 30 million barrels from the Strategic Petroleum Reserve (SPR) bringing the price of oil back down.

War and Oil Prices Political instability in the Middle East has caused great concern about access to oil given that this region accounts for a large amount of the worlds oil supply. In July of 2008 oil prices reached over $136 a barrel due to global concerns about the wars in both Iraq and Afghanistan. One of the main reasons that oil prices rose so precipitously during this time period was due to the fact that suppliers were unable to convince buyers that they would be able to properly deliver oil. When oil prices rise to these levels the American consumer then cuts back on driving in order to save money. This in turn decreases demand, which begins to drive the price of oil down. These are the basic laws of supply and demand that dictate the price of oil and illustrate the complex relationship between consumers and producers. How the recession affects Oil Prices In a recession there are a number of factors that can decrease demand for oil which causes the price of oil to drop. First, as consumers cut-back on their expenses driving is oftentimes one of the first expenses that will be cut. Many employers, understanding the financial strain their employees are under during a recession will oftentimes allow employees to work from home one or two days a week. This reduction in driving as a means to save money decreases oil demand and thus reduces oil prices. Another factor that affects oil prices in a recession is decreased demand for products. As consumers decrease spending, demand for oil also decreases as fewer products are shipped from manufacturers to consumer countries. Stores like Best Buy see less people buying televisions, stereos, etc. and in-turn reduce their forecasts with suppliers. This creates less demand for the shipment of goods which reduces demand for oil. Could Oil be a safer investment than Gold? By GIUSEPPE MARCONI for OIL-PRICE.NET, 2009/12/10 How many people around the world with money to invest are going to continue to fall for the advice of so called experts calling for them to invest in gold? Everyday, newspaper and television advertisements are enticing people to invest their capital in gold. They are backing up their advice with claims that investing in gold will safeguard their capital from high inflation. They also go further by telling prospective investors that investing in gold will protect their money and savings from turbulence in the world economy.

Unfortunately, a number of people are falling for this advice and are investing their money in gold without actually calculating the risks, and it must be said that there is now more risk than previously in using gold as an investment strategy. One of the main risks is the mind boggling amount of fake gold bars circulating. As reported by our partner site Gold-Quote.net, number of governments worldwide have been secretly carrying out audits of their gold reserves due to the fact that trading in fake gold has become a major criminal activity. The Chinese government has actually recalled its gold reserves being held by the Bank of England. However, ironically it is also a Chinese company which has been advertising the fact that they manufacture and sell fake gold based on an alloy known as tungsten. Their website, Chinatungsten Online, actually quotes the following, 'We are well accustomed to exploit more innovative applications of tungsten products. Gold plated tungsten is one of our main products.' It is no surprise that the Chinese may be at the forefront of criminal activity involving gold, as approximately sixty percent of the world's supply of tungsten ore is mined in China. Tungsten is a dream product for those who wish to make a profit from scams involving fake gold. While gold's density is 19.3 g/cm3, tungsten's density is 19.25 g/cm3, only 0.26% lower and given any practical measurements this difference is impossible to discern. Counterfeiters manufacture fake $480,000 400oz gold bars as follows: a brick of tungsten is cast, and a thick layer of gold is deposited via electrolysis, sealing all the edges and covering the whole surface. Although these gold bars resemble gold and contain on the surface approximately $50,000 worth of gold, they are not gold, and those that have mistakenly invested in tungsten filled bars or coins, thinking that it is a safe and lucrative investment, have been in for a nasty surprise. But the Chinese are not the only culprits, in October 2009, it transpired that there were tungsten-filled gold bars in the gold reserve held in Hong Kong... shipped from the USA. In the past number of years, some UK based investment banks have actually pulled out of trading in gold commodities due to their concerns regarding the amount of fake gold circulating. Criminals that are manufacturing and selling fake gold have been using such sophisticated methods, that even seasoned experts have been fooled. A number of US citizens have actually been calling for an audit of the Federal Reserves. One of the problems with identifying fake tungsten filled gold, is that it can only be detected by drilling the bar. When there are concerns about fake gold in such world renowned banking institutions as the Bank of England and the US Federal Reserves, there can be little doubt that the criminals, trading this gold, have been helped along the way by insiders working in these institutions. There is so much red tape involved with these banking institutions that it is impossible fake gold would have been able to infiltrate their vaults without help from insiders.

Whereas there is no doubt that real gold is valuable, it is no longer the safe investment that it once was. Rumours which are currently circulating that GLD EFT very likely holds tungsten counterfeit bars among its 1117 metric tons make frightening reading. This is more gold than the central banks of China, Switzerland, Japan and Europe put together. A large number of Investment strategists are now convinced of the fact that investing in oil is a safer and more lucrative investment strategy than investing in gold. Our studies show that this view is certainly correct. No one wants to make counterfeit oil, as there is no money in it. There is simply no substance known to man that produces as much energy per liter for as cheap as oil. Any attempt to make "counterfeit" oil, to manufacture such potent combustible material is guaranteed to cost more, a losing business proposition. So oil is counterfeit-proof because it is... cheap. On the other side crooks will always attempt to counterfeit gold and may turn a profit because it is... expensive (gold costs close to $1,200/oz today)and there are cheaper materials out there such as tungsten (only $20/lb) and "proven" modern manufacturing technologies that make counterfeited gold impossible to detect. As a result of the high amount of criminal activity now involved in the gold commodities market, anyone who invests in gold is taking the risk that some of the gold they purchase, whether they physically hold it or not, may include fake gold. You're better off owning crude oil.