If you drive a car, there’s no hiding the fact that gas prices are absolutely horrible right now. A gallon of gas in my area costs $3.22. The average price in the United States is about $3.19 per gallon. My Sonata took over 50 dollars to fill on Tuesday. Americans are griping about prices, but do we really understand what all goes into our crude oil prices?
Most of the world’s crude oil comes from the Middle East, and if you’ve been watching the news, there’s quite a bit of political unrest there. Egypt had a whole bunch of riots and political demonstrations until their president stepped down. Libya is currently adding to the mess that is over there, on the brink of civil war and adding to political unrest. This political unrest causes oil prices to increase.
Why does the political atmosphere of a country affect oil prices? Because if a country is having political unrest, the access to that country becomes more restricted, and importing and exporting from that country can become more difficult. This leads in a perception of a decrease in supply, which according to the economic principle of supply and demand, will cause the price of oil per barrel to rise. Notice, there may not be an actual decrease in supply, but the perception is enough to cause prices to fluctuate.
One of the biggest reasons that Libya is really affecting oil prices is because of the presence of British Petroleum (BP). In 2007, BP signed a contract with Libya topping about $900 million to explore and drill over about 21,000 square miles. BP is one of the largest oil producers, and even though the amount of oil they export isn’t as much as oil giants Saudi Arabia and Russia (approximately 85% of the almost 2 million barrels they produce is exported a day), they still play a significant role in the crude oil economy. Because of political unrest, the employees of BP who were working on exploring and drilling had to be evacuated, and their very expensive drilling project is now at a standstill.
Thankfully, oil prices in the United States went from over $100 a barrel to about $97 a barrel yesterday, helping ease the potential tension of the political events in Libya. It’s said that Libya is the 18th highest producer of crude oil in the world, so if they stop exporting, this could affect the economy and also the value of the American dollar.
The American dollar, because it is the currency most often used when talking about the crude oil industry, is devalued as crude oil prices go up. A dollar buys less oil, therefore causing inflation in countries that drill and export oil but don’t use the dollar as their primary form of currency. As inflation rises, it affects non-dollar economies negatively. Because global economies are very interlinked, these economies then affect others, causing the global economy as a whole to struggle.
Crude oil prices are a great example on how global our economy has become. Even though we have different political and economic systems worldwide, the web we’ve created of importing and exporting miscellaneous goods ends up being both good and bad. Political unrest, market crashes, or supply and demand issues in one country can affect the whole world, and crude oil exemplifies that perfectly, especially with what’s going on today.