Factors Affect the Prices of Energy Products
Oil and gas are physical commodities and their prices are affected by the forces of supply and demand for the commodity itself. Here are some key factors that will affect the price of oil and other energy products:
Demand affecting factors
Weather / Seasons
Weather conditions will have a serious impact on prices. A very cold winter or a hot summer will increase demand for these products as they are used to heat homes and also to power air conditioning units. These products are, by their nature, affected by seasons. In general, demand for these products will be higher in winter months.
An increase in car sales will increase demand for oil, while more efficient engines will reduce demand.
Increase in fuel tax / road tolls / tax on air travel, will cause a reduction in demand for oil and thus the price.
The heavy use of oil and natural gas is detrimental to the environment causing pollution and climate change. Increasing awareness and conscience of this, combined with technological advances improving the efficiency of renewable energy sources will have a lowering effect on the oil price.
As we saw in 2008 – 2009, the credit crunch and global recession has caused a huge drop in oil prices. In general, weaker economies will have less demand for oil, and growing economies will have more.
Supply affecting factors
The Organisation of Petroleum Exporting Countries is a cartel consisting of 12 oil producing nations including Saudi Arabia, Kuwait and Nigeria. As of April 2009, OPEC contributed 33.3% of the world's oil production. This significant portion coming from effectively 1 source allows OPEC considerable impact on the price of oil. Alteration in OPEC's supply is arguably the factor that has the most impact on oil prices, (in the short term at least).
As is seen in the past, (the 1973 oil embargo for example), growing political tensions or conflict can greatly affect the price of oil, and is certainly prevalent in recent times with the war in Iraq and growing animosity between the western and Arab worlds.
Other nations' production levels and inventories
As with OPEC, but in a lesser degree, the production levels, or stocks, of oil for other oil-producing nations, such as members of the OECD or Russia and the other post-Soviet states, will have an impact on oil supply, and, thus, the price.
As these products are fossil fuels, they have a finite lifespan and as such, over many years, supply will naturally diminish and the price will, in theory, rise.