Johnny Ch Lok

Oil demand and supply challenges Johnny Ch Lok

Interest Rate Impact to oil marketWhile views are mixed, the reality is that oil prices and interest rates have some correlation between their movements. However, they are not tightly correlated. In truth, many factors affect the direction of both interest rates and oil prices. Sometimes those factors are related, sometimes they affect each other, and sometimes there's no rhyme or reason to what happens. One of the basic theories stipulates that increasing interest rates raise consumers' and manufacturers' costs, which reduces the amount of time and money people spend driving. Fewer people on the road translates to less demand for oil, which can cause oil prices to drop. In this instance, we'd call this an inverse correlation. By this same theory, when interest rates drop, consumers and companies are able to borrow and spend money more freely, which drives up demand for oil. The greater the usage of oil, the more consumers bid up the price. Another economic theory proposes that rising or high-interest rates help strengthen the dollar against other countries' currencies. When the dollar is strong, American oil companies can buy more oil with every U. S. dollar spent, ultimately passing the savings on to consumers. Likewise, when the value of the dollar is low against foreign currencies, the relative strength of U. S. dollars means buying less oil than before. This, of course, can contribute to oil becoming costlier to the U. S., which consumes almost 20% of the world's oil. All of these oil demand and supply can influence oil price changes. Factors Affecting Demand & Supply of Oil Prices may include these factors as below: Crude oil supplies are crucial to the operation of developed countries, with 84,249,000 barrels consumed globally each day as of 2009. Because of the importance of oil supplies, fluctuation of oil prices can have a great effect on the global economy. The standard economic principle of supply and demand, based around the concept that the price of a product is directly related to relationship of supply related to consumer demand, applies to global oil prices and the resulting effects on worldwide economics. Increased Oil Consumption factorAs the world's population grows, global oil demand increases accordingly. According to the U. S. Energy Information Administration's 2009 statistics, the U. S. led the world in global oil consumption with more than 18 million 42-gallon barrels consumed each day across the country. Oil demand is highest in developed countries, with China, Japan and India trailing the U. S. in oil consumption. Oil Reserves factorThe ability to supply oil for world demand affects the ultimate price of the product. The world's supply of oil centers around the capacity of reserves. Reflected as the available supply, oil reserves are most often expressed in terms of "proven reserves." Proven reserves are expected quantities of oil, determined through analysis performed by geologists and engineers, that can be extracted with a high level of success using current methods. The potential of proven reserves can be increased through technological advances and further exploration of supply locations, as well as economic conditions that favor oil production. Exchange Rates factorWorld exchange rates directly affect the worldwide price of oil in terms of how the cost is reflected in national markets. The declining value of the U. S. dollar increases the impact oil prices have on the American economy. When oil prices increase, Americans must pay even more U. S. dollars to buy oil due to the reduced value of the currency. In cases of appreciation, such as when the euro strengthened in value, increased oil prices can be canceled out by a more valuable form of money.