Brent crude prices are hovering around the 85 USD mark. China’s economic woes combined to keep prices in check despite the recent OPEC+ production cuts. A stabilizing USD, soaring interest rates, tightening bank credits, and sluggish manufacturing and trade should conspire to moderate price increases throughout 2024 despite drawdowns in global stocks.
Yet, the price of oil is no longer an essential determinant of the economic health of the West. To create the same amount of economic output, manufacturers use much less fat than they used to.
Moreover, today, there are futures contracts, which allow one to fix the price of purchased oil well in advance. There are options contracts that can be used to limit one’s risks as a result of trading in such futures contracts.
So, why is the price of oil on the ascendance?
Because oil has become a form of investment and a hedge against rising inflation. People plow their savings into oil and speculators drive the markets. As Saudi Arabia correctly observes, oil prices are no longer determined merely by supply and demand.
Who decides on the domestic price of oil and its derivatives?
In some countries, prices are fixed entirely by market forces, supply, and demand, usually through specialized exchanges (e.g., the Rotterdam Exchange). The market is completely deregulated: exports and imports are totally allowed and free.
In other countries, prices are fixed by a committee of representatives of the government, the oil industry, the biggest consumers of oil, and representatives of households and agricultural consumers.
In most countries, prices are changed every 3 or 6 months based on the cost of oil at a certain port of delivery. In Israel, for instance, the price of oil fluctuates every three months according to the price of oil delivered in certain Italian ports (where Israel gets most of its oil delivered). This is an automatic adjustment.
In a few countries, the prices are fixed by the competent Ministry in accordance with the actual costs of the oil (importing, processing, and distribution) + a fixed percentage (usually 15%). This is called a cost-plus basis pricing method.
The international price of oil is determined by the following factors:
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