How Much for a Barrel of Oil?

How much for a barrel of oil? That is the question that is on people’s minds as we all look at the exorbitant price of gasoline. As of this writing in June 2022, according to OilPrice.com, the Brent crude oil price is 115.2.  

But the price fluctuates wildly. After the EU (European Union) announced that it would reduce the amount of Russian oil it now imports by 90 percent by the end of the year 2022, the price of Brent crude, which is normally used as a benchmark for commodities prices around the world, skyrocketed in June 2022, actually passing $124 per barrel for the first time since early March of 2022.

Since then, prices have decreased marginally to roughly $117, primarily due to anticipation that OPEC will pump more oil. However, this decrease is not sufficient to alleviate the agony that consumers are feeling at the pump or to contain the rampant worldwide inflation that has occurred. They are expected to remain high due to the embargo imposed by the EU as well as a rebound in demand in the economy of the world’s second most important country.

As a consequence of the COVID-19 epidemic and Russia’s invasion of Ukraine, the global community is currently dealing with an unprecedented shortage of energy. The price of a gallon of gas in the United States is consistently about $5, but the price of energy in Europe is still unreasonably high. The Joe Biden Administration has pulled out all the brakes, releasing oil from the Strategic Petroleum Reserve and pleading with Saudi Arabia to raise production levels. At the beginning of June, they caved and made the announcement that they will increase output during the months of July and August.

However, this provides customers very little solace. The price of oil has not decreased significantly. In point of fact, it is very possible that it will increase, eventually reaching a price of over $150 per barrel by the end of September; this is a figure that has not been seen since 2008. There is hardly much that the administration of Vice President Joe Biden can do to prevent the imminent spike in prices, unless they want to either cause a recession or mandate significant consumption reductions through a pandemic-style lockdown.

How Much for a Barrel of Oil: Factors Determining Oil Prices

The fact that oil is now a commodity and that it is in high demand all over the world brings with it the possibility that even very little shifts in price might have a large effect on the economy. The question how much for a barrel of oil should be answered by acknowledging the fact that there are other factors that determine oil prices. Of course, the primary factor in determining the cost of oil is the hard cost of producing the oil. But there are other factors too. According to Investopedia.com, the following are the two key elements that influence the price of oil:

Oil Supply and Oil Demand

The idea of supply and demand can be broken down into its component parts very easily. The price ought to go up whenever demand grows (or the supply falls), whichever comes first. When there is less of a demand for something (or more of it), the price should go down. Does it appear easy?

Not exactly. In reality, the price of oil is established on the market for oil futures, as is often known. An oil futures contract is a legally binding agreement that grants the buyer the right to purchase oil by the barrel at a predetermined price on a predetermined date in the future. The price and the date are both specified in advance. According to the terms of a futures contract, the buyer and the seller each have the responsibility of completing their portion of the transaction by the agreed-upon date.

As a result of the downturn in the economy in the spring of 2020, the price of oil plummeted. Although OPEC and its partners agreed to significant production cuts in an effort to stabilize prices, prices have continued to fall to levels not seen in 20 years.

Public Market Sentimentality

The public’s mindset is another significant contributor to the cost of a barrel of oil. The simple notion that there will be a significant increase in oil demand at some point in the future can result in a significant increase in the price of oil in the present, as speculators and hedgers alike purchase oil futures contracts.

The inverse is likewise correct, as common sense would dictate. When oil futures contracts are sold (perhaps sold short as well), the mere conviction that oil demand will decrease in the future can result in a rapid drop in present prices. This means that prices can hinge on little more than market psychology, which means that prices can fluctuate dramatically.

How Much for a Barrel of Oil: The Pandemic Effect

As a result of the COVID-19 outbreak pandemic, a number of refineries in the United States and Europe were being forced to close their doors. This in turn led to a decrease in the global refining capacity. In reaction to the epidemic, several facilities were forced to close their doors, although oil firms were already planning to reduce their refinery capacities in late 2019, due to shrinking profit margins and the unpredictability of future demand. Before the COVID-19 pandemic struck, the oil industry was dealing with what was being called a “peak oil demand,” which was tied to a slowdown in economic development, an increase in the number of people opting to drive electric vehicles, and a general push toward net-zero greenhouse gas emission obligations.

Oil companies have not committed to the construction of new refineries since there is a possibility that future demand could decrease, which does not justify the spending of capital. As a direct consequence of the present consumption boom, demand for products is currently exceeding capacity at refineries, both for gasoline and diesel. As a consequence of this, refineries in the United States are currently operating at 93 percent of their overall capacity.

Even though countries and companies are able to draw from inventories of oil and oil products that have been stored for future use, an innovation that emerged during the energy crisis of the 1970s and continues to shape energy economics today, those inventories are being depleted at a rate that is unprecedentedly quick. One of the reasons why prices will continue to go up is because of this.