ACADEMIC RESEARCH ESSAY ON

OIL PRICES

Prakhar Gupta
Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

TABLE OF CONTENTS

1. INTRODUCTION.

2. GLOBAL OIL MARKET (HISTORY AND CONSUMPTION).

3. FUEL PRICES: REASONS WHY FUEL PRICES ARE RISING TO

HISTORIC HIGHS.

4. DETERMINANTS OF OIL PRICES.

5. CONCLUSION.

6. REFERENCES AND OTHER SOURCES.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

1. INTRODUCTION

Oil is a magic word that always makes news. There is hardly a nation that does not seek this
indispensable natural resource. A country that already possesses crude oil wants more. They
struggle to explore it at almost any cost. The common man does not know much about this
strange mineral oil although in almost every country he bears the burden of the cost of
exploration of oil or its import.

Oil is one of the most economically mature commodity markets in the world. Even though
most crude oil is produced by a relatively small number of companies, and often in remote
locations that are very far from the point of consumption, trade in crude oil is robust and global
in nature. Nearly 80% of international crude oil transactions involve delivery via waterway in
super tankers. Oil traders are able to quickly redirect transactions towards markets where prices
are higher.

This academic research paper will highlight the global oil markets and the reasons so as to why
the prices of the fuels have been rising to such historic highs and this paper will also dwell
deeper into what are the key determinants that determine the oil prices globally. This paper
also includes some graphs showing the trends relating to various oil shocks, demand, supply,
consumption of oil globally.

The main focus of the Research is to understand the reasons for increasing fuel prices and to
understand about the various drivers/determinants that leads to an increase or decrease in the
oil prices all over the world.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

2. GLOBAL OIL MARKET (HISTORY AND CONSUMPTION)

The Global oil Market has been highly volatile throughout the years. To take a look back at
history, let’s look at the image below.

(Image source: Department of Energy and Mineral Engineering, U.S)

This figure shows the volatility and changes of oil prices over the years. The development of
our current globalized oil market can be broken down into a few different stages. The first
phase was marked largely by intra-company transactions with occasional inter-company "spot"
sales. The second phase was defined by the emergence of OPEC and its attempts to influence
an increasingly global oil trade for political ends. The third phase is defined by the
commoditization of oil markets, with regional prices linked by inter-regional trade and the
development of sophisticated financial instruments such as futures and option contracts.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

Another reason for the volatility in the oil market and the prices is the various Shocks known
as “OIL SHOCKS” that have been occurred throughout the years. It has been 48 years since
the oil crisis in 1973/74, which also coincided with the emergence of a new regime in the global
market for crude oil, in which oil prices have been largely free to fluctuate in response to the
forces of supply and demand.

(Image source: http://www.enrichwise.com/oil-shock-crisis-since-1973-interesting-chart)

The image above shows the various oil shocks such as Arab oil embargo, Iranian revolution,
Iran-Iraq war, First Gulf war, then we had the second gulf war, then the financial crisis etc. All
of these events have occurred over the years and lead to fluctuations in the prices of per barrel
of oil in the global economic market. These oil shocks have been one of the reasons for the
prices to be high or low and all of these fluctuations affect the demand and supply of oil in all
over the world.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

Global oil consumption varies from region to region and country to country, depending upon
population, income and total spread of the economy. On region wise, Asia pacific region is the
highest consumers of oil with 36.8% of total share, then North America 23.9%, followed by
Europe 15.2%, Middle East 9.6%; and Africa with 4.2%. (Data from BP- British petroleum
statistical Review of world energy 2020)

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

3. FUEL PRICES : REASON WHY THEY HAVE BEEN RISING TO

HISTORIC HIGHS

International fuel prices have demonstrated a substantial volatility over the years. Within end-
2003 until the mid-2008, nominal international fuel prices heightened more than four times,
with most of the growth taking place on 2007 and the first half of 2008. Many countries have
been reluctant to fully infiltrate growths in world prices. The mounting of world oil prices have
appose difficult policy alternatives for oil importers and exporters alike. (International
Monetary Fund. Fuel and food price subsidies: Issues and reform options. Prepared by the
Fiscal Affairs Department).

The average price of Fuel around the world is 1.09 U.S. Dollar per litre. And the average
price of diesel around the world is 0.99 U.S. Dollar per litre. However, there is substantial
difference in these prices among countries. As a general rule, richer countries have higher
prices while poorer countries and the countries that produce and export oil have significantly
lower prices. One notable exception is the U.S. which is an economically advanced country
but has low fuel prices. The differences in prices across countries are due to the various taxes
and subsidies for fuel. All countries have access to the same petroleum prices of international
markets but then decide to impose different taxes. As a result, the retail price of fuel is
different. (Global Fuel prices Report, 2021)

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

Let’s take an example of a country India, The fuel prices in India have been the highest and
currently they have touched the three-figure mark. Being a developing country and most of
the population of the country placed in the Middle-class Income Group it is very difficult for
the people to afford the price of the fuels.

(Image source: Trading Economics, Indian Oil corporation ltd.)

To support my above statement here is a graph showing the trend of prices from the 2000’s to
the current Year’s price in U.S. dollars which have been on an increase from 0.48 U.S. dollars
to 1.21 U.S. dollars in 2021. The Graphical representation shows an upward movement in the
fuel prices over the years.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

Reasons for Increase In the fuel Prices to historic Highs

 More Electric Cars and Fuel Efficient Cars: Over the last 50 years, cars become
increasingly more fuel efficient. The days of fuel-guzzling American cars are pass and
the focus is on European, Japanese and Korean cars that are genuinely more fuel
efficient. Then there is the threat of electric cars from companies like Tesla of the US.
The company Tesla plans to increase its electric cars capacity by 40 times over the next
10 years. As electric car batteries mature and electric cars become more of a feasible
business proposition, the demand for oil as a fuel could shrink further.

 Global shift to environmental friendly practices: Climate change is a major

challenge for nations and fossil fuels have been one of the biggest polluters of the
environment. The Paris Climate Accord sets out a clear time-table to shift out of
inefficient power production and reduce the dependence on fossil fuels for cars. Over
the next 40 years, the world will increasingly move away from fossil fuels. As this trend
gets punctuated, the global demand for oil is likely to reduce impacting prices in the
process.

 The Prices of the Brent crude: One of the reason for the rise and other price
fluctuations is the price of Brent crude. The price of oil affects individual spending
choices. It forces companies to make difficult decisions. It can even change relations
between countries. Oil is perhaps the world's most important natural resource and
impact the daily lives of people worldwide.

 Taxes Levied by the Governments: Federal, state, and local government taxes also
contribute to the retail prices of gasoline or Fuel. Sales taxes along with taxes applied
by local and municipal governments can have a significant impact on the price of Fuel
in some locations.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

 Impact of OPEC Members on Oil: One body has great influence over the worldwide
price of oil. The Organization of Petroleum Exporting Countries, more commonly
known as OPEC, is a cartel made up of 12 of the world's biggest oil-producing nations,
including all of the major Middle Eastern states, Venezuela and Nigeria. According to
OPEC, this cartel controls 78% of the world's known oil reserves. The major oil
producers not in OPEC include Russia, Canada, and the U.S.

Since the OPEC nations produce so much of the world's oil supply, they can manipulate
the price per barrel depending upon how many barrels per day the group will sell on the
world oil market. If the group wants the price to rise in order to make more money, they
can reduce the amount of oil contributed to the world market. And if they want the price
to dip—high energy prices drive down demand from OPEC's consumers—they can
release more barrels to the market.

 Uncertain or Uncontrollable events: Natural disaster, Health hazard such as the one
we are facing today, the pandemic or corona virus or the events that cannot be explained
by economics are the reason why the prices of fuels have been substantially so high.

So, these are the main reasons why the fuel prices have been to historic highs.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

4. DETERMINANTS OR DRIVERS OF THE PRICES OF OIL

In my opinion, there are various factors that determine the prices of oil in the market.

 Demand for the Oil: The demand from both OECD (Organization of Economic
Cooperation and Development) and Non-OECD Members helps to determine the prices
of oil in the global market and considered to be main driver for prices. OECD countries
tend to have fewer subsidies on end-use prices, so changes in market oil prices are often
quickly reflected in prices faced by consumers. If prices are expected to remain high or
increase in the future, more consumers may decide to purchase more fuel efficient
vehicles or use public transportation. Decisions like these help to reduce future oil
demand and would tend to moderate expected price increases. After the lockdown there
have been sudden rise for the demand for oil consumption.

The price elasticity of demand for oil have been inelastic that means even if the prices
of the per barrel drops there is no change in the Demand for the oil for consumption.

 Supply for the Oil: The role of OPEC as the key determinant of oil prices has been
reducing with its share going down from 50% to 35%. However, the OPEC still holds
the largest wealth of proven oil reserves in the world. The supply from both OPEC and
Non-OPEC member countries are considered to be the most crucial driver that helps to
determine the Price of the Oil in the global market. Now, after the pandemic OPEC
members and Russia have decided to cut the supply of oil which is leading to high
prices of the Oil. If this situation continues the prices of oil might go even higher.

 Derivatives Market or Market speculations: More and more, market participants are
buying and selling crude oil, not in its physical form, but in the form of contracts. For
example, airlines and oil producers use derivatives, like futures and options, to a hedge
against swings in the price of oil, while speculators drive those prices upwards or
downwards when there are waves of buying or selling amid incoming news.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

 Political Events and Crisis: Since supply is determined by the big oil-producing
countries, tension with one of those nations can cause major problems. So if there’s war
or conflict in an oil-producing region, crude inventories could seem threatened, and that
could ultimately alter the price of oil. For example. We have seen lots of wars and Oil
shocks such has Arab oil embargo, or gulf war all of these events have been the drivers
for the fluctuations in the prices of the Oil.

 The U.S. Dollar: When the U.S. dollar is strong, you need fewer U.S. dollars to buy a
barrel of oil. When the U.S. dollar is weak, the price of oil is higher in dollar terms. The
relationship between oil and the United States seems to be changing, reflecting the
country’s growing role in the global oil industry.

5. CONCLUSION

This paper includes my opinion on the reasons and the determinants of oil prices in the
market.

After the thorough research it can be concluded that the oil prices can be controlled only
when there is enough supply in the market which is not possible as the oil reserves are
depleting and also other factors such as health hazard (corona virus), or climate change,
natural disasters, tax imposed by the government, and then OPEC’s supply cutback all of
the reasons can be considered.

Course Name – PGDM (GEN)

Name – Prakhar Gupta
Roll NO. – 019
Macro Economics

6. REFRENCES

 “Crude Oil Prices Fall: Profit-Booking and Strong US Dollar - Market Realist.”
 International Monetary Fund. Fuel and food price subsidies: Issues and reform
options. Prepared by the Fiscal Affairs Department
 World Bank. Venezuela: Efficiency repricing of energy. Sector Report No. 13581
(Washington: World Bank); 1995
 Energy Procedia 47 by Dhani Setyawan, Centre for Climate Change Financing and
Multilateral Policy, Fiscal Policy Agency, Ministry of Finance of Indonesia (2014)
 British Petroleum (2016), “2015 in Review”, BP Statistical Review of World
Energy Journal 2016.
 Energy Information Administration (2019), “What drives crude oil prices?”,
U.S. Energy Information Administration.

OTHER SOURCES
 https://www.eia.gov/finance/markets/crudeoil/
 https://www.evanshalshaw.com/blog/top-ten-cheapest-petrol-countries/
 https://www.globalpetrolprices.com/articles/41/
 https://www.iea.org/data-and-statistics/charts/global-fuel-price-changes-
2005-2019
 https://www.elibrary.imf.org/view/IMF001/07974-9781451863222/07974-
9781451863222/07974-9781451863222.xml?language=en
 https://oilprice.com/
 https://www.bp.com/content/dam/bp/business-
sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-
review-2020-oil.pdf

Course Name – PGDM (GEN)