On Sep 15th, 2008, Lehman brothers filed for bankruptcy. That event alarmed the downturn of world economy. Since then different economic crises around the world happened. People suffered from losing big money in investments, salary cut or even worse losing jobs. But there is one good thing happened, the oil price went down sharply.
I am an insurance agent. I have to drive a lot to visit people around Taiwan. The bill of oil for my car has been a big burden for me, especially when the oil price is over $70(US$) per barrel. That high oil price period lasted for 13 months, from Sep 2007 to Sep 2008. During that period, I had to quit my favorite coffee-caramel macchiato(焦糖瑪奇朵) to spare money for the expensive oil bill. Right now, the oil price is below $50 per barrel. I can enjoy having caramel macchiato at my favorite coffee shop StarBucks without worrying about running out of budget.
Dear T/M! The price of oil mattered a lot to my life. I am curious about what determines the price of oil and am going to share some knowledge about that with you.
Traditionally, the oil price is made according to relation of supply to demand. Supply cut or strong demand will push up oil price.
In the history, the supply cut from oil exporting countries made the price of oil surging, e.g.:
.Yom Kippur War(以阿戰爭)- Arab Oil Embargo(石油禁運)
The Yom Kippur War(以阿戰爭) started with an attack on Israel by Syria and Egypt in October, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab oil exporting nations imposed an oil embargo(石油禁運) on the countries supporting Israel. The supply cut pushed oil price from $3 in 1972 to $12 in 1974.
.Iranian revolution and Iran-Iraq(兩伊戰爭) wars
The Iranian revolution happened in 1979. A new government led by Khomeini(柯梅尼) replaced the old government. The revolution weakened Iran. Then Iran was invaded by Iraq in Sep 1980.
Both Iran and Iraq are the members of OPEC (the Organization of Petroleum Exporting Countries).
The combination of the Iranian revolution and the Iran-Iraq War resulted in the oil production cut in both countries. The supply cut caused oil prices to increase from $14 in 1978 to $35 in 1981.
Strong demands will push up oil price, too. The strong demand for oil from rapid growth in China, India and other emerging economies push up the oil price from 2002 to 2006.
Now, there is another factor affects the oil price, speculation(投機).
In the past OPEC controlled the oil price, but now the Wall Street determines the oil price.
From the history of world economy, most of the times, we are suffering from inflation. This situation makes us put money in gold, oil and real estate to hedge(避險) against rising inflation. Oil has become a form of investment. People invest their money into oil market, even though they do not have a strong demand for oil.
By purchasing large number of future contracts of oil, speculators push up oil prices.
In the most recent sustained run-up in oil prices, from January 2007 to July 2008, large financial institutions had been pouring billions of dollars into the oil markets to try to take advantage of price changes. The USA economy has been slowing down in that period. The price of oil is supposed to come down, but it doubled in less than two years, from $50 to $140.
The world economy has been suffering from deep recession since the subprime mortgage crisis started in the United States two years ago. Every government is trying very hard to implement different economy stimulus plans . Their major strategies are pouring huge amount of money to stimulate economy. When more and more money are pouring into the market, the inflation will be back.
Currently, the oil price is around $40 per barrel. But it will bounce back or get even higher when the economy is booming and the rising inflation is a concern again. What is your strategy to deal with another round of run-up in oil prices? Dear T/Ms !