Explain the current system of global oil pricing.

Oil is becoming a great factor in the global economy. Many years ago, drilling and searching for oil was a very tough job to conduct, and sometimes the process used to end up with finding nothing. The first commercial oil well was drilled in Azerbaijan in 1847. Oil pricing generally refers to the spot price of a barrel of crude oil.

Determinants

The determinants of the oil prices are supply and demand. It also depends on market conditions. When demand increases, or the supply decreases then the price got increased and vice versa. Apart from that it also depends on market psychology.

Oil price affecting

  • In 1920, the commodity price was hiked. After that in 1958 and 1980, another hike was noticed. And in both cases of 1920 and 1980, oil peaked with the commodities index.
  • For the countries that produce oil, the fall and rise in prices have led to a huge loss or gain of revenue. The biggest influencer of oil prices, OPEC has already lost its dominance on oil price scenario and some countries such as Saudi Arabia have not stood with this group in the fear of loss of market share. The impact on Venezuela can be seen reeling under high inflation. Russia, whose 70% export income came from oil exports is hit hard with changing oil economics.
  • The demand depends on economic activity, increased efficiency, and a growing switch away from oil to other fuels.
  • Internal problems and foreign relations between big oil producers affect their output.
  • The USA has become one of the world’s largest oil producers. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.
  • The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price.

Comment

India’s economy is hugely dependent on the world’s oil economy which directly affects the account deficit, the government’s balance sheet, and inflation. The government has to maintain a smart balance between cutting and retaining different subsidies for diesel, liquefied petroleum gas, kerosene, etc. he prices of oil seem to be low in the near future. However, any decrease in supply, further conflicts in the Middle East, increased demand in Europe, and China may lead to a further price hike.

Question for UPSC Mains:
Explain the current system of global oil pricing.

Published: February 6, 2016 | Modified:September 17, 2020

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