On July 1, the price of crude oil dipped below US$40 per barrel for the first time since April. Market analysts correctly argue that as supply expands due to excess stockpile of crude oil inventory floods the market, at a time when global demand for crude oil is still low, the result is a fall in price. It is somehow difficult to predict what the price of the commodity will be a month from now, as some analysts say that experience teaches them not to try to predict its price movement lest that one is prepared to take financial losses from trading in the price of crude oil. However, despite the difficulty of prediction, it is not impossible to learn about the reasons that drive the economics of oil.Embed from Getty Images
Here are several factors to consider.
Domestic politics. For the United States, this matters even more in the run-up to Presidential elections. The desire to demonstrate that the United States is responding to the unspoken need to disengage progressively from the Middle East region, fundamentally through its direct and indirect military presence, is inevitably linked to its overdependence on imported oil (especially from the Middle East). This is made complicated by the stark reality that Japan and other non-oil producing industrialized economies still depend heavily on imported oil from the Middle East. Regardless, U.S. continuous engagement in the Middle East seems to generate undesirable effects on U.S. interests (and those of its allies) especially evident since the September 11 attacks on U.S. soil. For the U.S. oil industry, this can mean a signal to stockpile on crude oil inventory to encourage the nation’s independence from imported oil, to doing the opposite in order to boost the price of crude oil so that it becomes commercially viable for shale oil producers to continue their operations.
Military engagement. On the other hand, if one is to appoint a de facto global policeman to patrol troubled and potentially troubled regions of the world, no nation is better equipped and better trusted than the United States to undertake the task. With about a dozen operational aircraft carrier groups, no other nation is capable of being called upon for immediate military engagement simultaneously in the Pacific, Atlantic and Indian Oceans. For the Middle East region generally, the desire to maintain overall political stability seems to require a continuous U.S. engagement, be it indirect military support or at the most extreme direct military confrontations. For OPEC oil producers, most of whom also happen to be Middle Eastern nations, the unspoken role of the cartel inevitably includes the desire to see a guarantee that U.S. engagement continues in the region. This can mean anything from controlling the supply of crude oil in order to force the United States to continually depend on imported oil, especially from the Middle East; a low oil price policy may do just that as it hampers the ability of U.S. shale producers to continue stockpiling domestic oil inventory in the United States, which in turn would have the undesirable effect of lessening its dependence on imported oil.
The bottom line is that, although the market price of oil may be controlled by the economic laws of supply and demand, it is the underlying factors that drive the levels of supply and demand.