What are the factors that determine the cost of a barrel of oil?

Question

What are the factors that determine the cost of a barrel of oil?

Answer 1

yeah, what that other dude said :P

Answer 2

supply & demand in a free market

Answer 3

Actually, it's not a matter of demand and supply but rather demand and profiteering.

NATIONALIZE OIL NOW!!!

Answer 4

Oil prices are determined on the mercantile exchange - which is like a stock exchange but for commodities like oil, corn, etc. The price you hear about in the news is the last day's price that people were willing to pay for oil. The exchange works like an auction so some people bid a certain price and if someone else accepts their offer a trade of oil for cash is made.

Inflation is usually measured by the CPI of consumer price index which measures the price of a "market basket" of products which average people are buying. The content of the basket stays the same year to year and included things like milk, bread, and gasoline.

Since the price of gasoline is linked very closely to oil, the price of oil going up makes gas go up which in turn make the CPI go up. This indicated inflation.

Also, oil can affect the price of other goods in the market basket because the price of everything includes the shipping costs which are dependent on diesel fuel costs for trains or trucks.

At this point, you might be asking,"what makes the traders on the mercantile exchange decide what a fair trading price is?". This is a good question. Price is mostly affected by supply and demand issues. The supply is determined by how much oil comes out of the ground AND is released from the massive oil reserves.

The amount of oil that can be pumped and the rate of growth in production is known roughly. The only thing that can affect the supply further is whether groups like OPEC decide to pump more or less. If they say less supply goes down, and oil prices go up because oil is more scarce.

Just like if you have an original issue 1 superman magazine now it's worth a lot more than when it first made because there aren't as many around now.

On the supply side that is determined by how many people are using oil. The US and Europe use the most, but recently India and China are starting to use cars a lot more. This means that a market of 2 billion people is starting to come into the market place, but the supply of oil is pretty much fixed. Since they have to spread the oil a lot more thinly, it becomes more scarce and the price increases.

Another thing that affects oil prices is the value of a US Dollar (of any currency you're buying gas in). Since the dollar itself is becoming devalued this means you need more dollars to buy a barrel of oil. For instance, if you used gold to buy oil the price really only changed a few percent - instead of over 300% in the past 10 years.

These 3 things: supply, demand, worth of the dollar, are making the price of oil go through the roof. There isn't really much the government can do to stop it either. The solution lies in either: lowering demand - which won't happen with India and China; increasing supply - which might happen by drilling for oil in new places; or by switching to different fuels like biodiesel.

I hope that answers your question.