The importance of oil
Oil is very useful in several processing plants and industries. The product is paramount since a number of goods and services use it as a major component in their production, supply, and delivery. Although several processing plants use electricity and other sources of energy to power their plants, they still need oil in their various operations. Many international companies rely on oil as their main source of energy. Additionally, suppliers and distributors of different products need oil for the effective execution of their services (Itō and Rose 43). Trucks, water vessels, and aircrafs need oil to deliver the required products on time and in the right qualities. Without oil, several products fail to reach the required destinations on time. As such, the importance of oil in the transport sector is incomparable.
Besides the importance of oil in companies and sectors such as transport, it is very critical in the economy of various countries in the world. Mobbs states that due to the high demand for oil, which is less elastic regardless of the changes in price, several countries suffer when the price of the product increases (57). For instance, the recession that affected several countries recently took place because of the increase in the price of crude oil.
Therefore, oil has substantial effectsoin the economies of developing and developed countries of the world. The implication of its relianceoin production, supply, and delivery of products is a direct reflection on the prices of the respective goods and services. In essence, when the price of oil rises, the prices of many products in the market demonstrate a similar increase.
Factors That Influence the Price of Crude Oil
Crude oil has various factors that influence its price. Factors such as cost of production, mining costs, and price of materials used in production affect the price of crude oil (Clô 70). It is imperative to note that the cost of production directly affects the price and leads to changes in the overall price of crude oil. When the cost of production rises, it initiates a similar increase in the price of crude oil, whereas a reduction thein cost of production leads to a decrease in the price.
As a result, the cost of production is one of the factors that have significant effects on the price of crude oil. Another factor that affects the price of crude oil is the cost of mining. While production cost incorporates the cost of mining and other explicit and implicit costs incurred by the oil manufacturers, mining costs refer to the costs incurred during the process of extracting the product. Fundamentally, a change in the cost of mining leads to pronounced changes in the overall price of crude oil.
Other factors that affect the price of crude oil include the cost of materials used in the process of production. Essentially, materials are useful ithe n production and supply of the product, and thus, an increase in their cost leads anto increased price of crude oil (Bret-Rouzaut and Babusiaux 45). Furthermore, since the manufacturers want to maximize profits and minimize expenditure, any extra cost incurred in the process of production cascades across all the stakeholders involved in the purchase and production of oil. Materials are importa,nt and their utilization is practical thein production, supply, and delivery of oil. Therefore, materials used in oil production are among the factors that determine the price of crude oil.
The Role of Demand and Supply in Determining the Price of Oil
Demand and supply play integral roles in dictating the price of oil. Since oil is the main product used ithe n generation of energy and production of several products, its demand is usually high. Although the demand for the product is high, there are minimal fluctuations associated wi theth latest inventions of alternative sources of energy. Conversely, the high demand for oil has been practical in increasing the prices of a number of goods and services in the market (Clô 34). The inflation that occurred recently was an outcome of the increasing demand for oil, which led the to high prices of the commodity. Additionally, since various countries are developing, the demand for oil in these countries is high, a fac thatich increases the price of the commodity ,and at ti,mes initiates its scarcity in the market.
On the other hand, supply also plays a principal role in determining the price of oil in the market. According to Itō and Rose, when the supply of oil reduces in the market, the prices shoot becaof use demand increases (56). As such, minimal supply of the product leads to increased prices. Since oil is not renewable, its use ends after the first consumption. Due to its non-renewable nature, the demand is usually high, and hence, supply, can at t,imes fail to match up to the required quantities. The outcome of the inability to supply the required amount of crude oil in the market is increased prices of the product. However, when the required quantity of oil is available, the price decreases. Therefore, supply and demand are very critical in determining the price of oil in the market.
Bret-Rouzaut, Nadine, and Denis Babusiaux. Oil and Gas Exploration and Production: Reserves, Costs, Contracts, Paris: Editions Technip, 2011. Print.
Clô, Alberto. Oil Economics and Policy, Boston: Springer US, 2000. Print.
Itō, Takatoshi, and Andrew Rose. Commodity Prices and Markets, Chicago: The University of Chicago Press, 2011. Print.
Mobbs, Paul. Energy beyond Oil, Leicester: Troubador, 2005. Print.