Oil Prices Explained
Wednesday April 22, 2009
Oil Prices Explained
The correlation of the oil prices and the stock market of various countries can not be easily discounted. When oil prices increase, the stock market price often decline for a couple of reasons: the increase in the oil prices brings uncertainty into the market and higher oil prices results to higher processing, production and transportation costs.
Oil Prices in Perspective
There are many factors that affect the oil prices in the world market: the oil demands of different countries, supply issues, market speculations and other factors.
Demand
One of the major factors that affect the oil prices is the volume of oil demands of different countries. In recent years, countries that are in the process of economic expansion have demonstrated increased demand on different petroleum products. The increased demand ultimately translated to the increased oil prices in the world market.
Supply
According to the supply and demand analysis in economics, if there is an increased demand for a certain good at a prevailing price, they will tend to bid the price up. Since there is a shortage in the supply of oil in the world market due to varied reasons, different countries bid the price up; consequently, the oil prices increase.
Speculations
Speculations about the petroleum futures volume could contribute to the increase in oil prices. Speculators influence prices by taking larger positions in crude oil futures.
Other Factors
Since oil prices tend to be unstable, other variables aside from supply and demand and speculations influence the oil prices in the world market. For instance, socio-economic and political crises may affect oil prices, though some may have temporary impact.
Since oil is traded in US dollars, the value of US dollar has great impact in oil prices. The real and nominal values of different currencies vis a vis the US dollars should also be considered.
Oil Prices and Stocks
Increased oil prices could result in a decline in the stock market. Economic uncertainty and oil prices most often than not affect the stocks. Studies have shown the correlations between changes in oil prices and the stocks. Studies revealed that a rise in oil prices suggests a lower stock market and a drop in oil prices infers a rise in stock prices.
Oil Prices and Alternative Fuels
World economies are looking into tapping alternative fuels such as natural gas and renewable energies like solar power, wind power and biofuels, which are expected to have major impact on oil prices.