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How is the price of oil formed?

How is the price of oil formed?

Oil is still the dominant world fuel. However, this energy may soon not only lose its position, but also significantly lose in value due to the dynamic development of alternative energy sources.

The basic factors of energy pricing are demand, production, and strategic reserves of oil energy. Nonetheless, there is a number of the other factors.


Naturally, the basic factor is demand, in particular, its decline or increase. Fluctuations in demand may be due to increase in oil production in some of the exporting countries, or, for example, deterioration of the economic situation.

The state budget

The next factor is budget of the exporting country. The government may decide to cover the budget deficit by exporting oil setting a price threshold for sales of fuel. These facts are observed throughout the economic history.


Political factor is probably the most decisive in any branch of the economy today. Oil is no exception. Everything that can be regulated by the government - taxes, opposition sentiments, personal sympathies or interests - all this affects the final product and, in particular, its price.

Alternative energy sources

Nowadays, alternative sources of energy such as solar cells, shale gas, wind power, etc become more popular. In parallel with this, the world actively promotes the idea of ​​introducing energy-saving technologies. In the future, it may lead to a gradual decline in demand for the classic fuel - oil.

There are several secondary factors like strategic energy reserves, speculative market processes, force majeure such as natural disasters, depletion of sources, excess of oil, and even international terrorism. Moreover, the price can be determined by the cost of oil during mining processes. The more expensive its mining is, the bigger is the price of the final product. It is worth mentioning that the price of oil can really differ drastically depending on the region of mining.

The Organization of Petroleum Exporting Countries (OPEC) plays an important role in the pricing of the energy. It can set quotas for oil production as well as set the optimal cost per barrel. For example, just the other day the OPEC decided to extend the global agreement on limiting oil production for another nine months of this year.