Oil price fluctuations and
The only constants in the oil market are change and unpredictability. This highlights the volatile nature of oil prices and the fact that they can change rapidly due to a variety of factors such as geopolitical tensions, supply and demand imbalances, and natural disasters. It serves as a reminder that while fluctuations in oil prices can have significant impacts on the global economy, they are ultimately unpredictable and can be difficult to forecast.
Whilst the price of oil fluctuates, the demand for energy remains steadfast, and the world’s reliance on oil as a fuel source is certain to continue to grow.
A BIT OF HISTORY
Oil prices have been volatile since 1980 and have experienced numerous spikes and drops. In the 1980s, oil prices reached an all-time high due to the Iranian Revolution and the Gulf War. The price of oil exceeded $140’s per barrel in 2008 due to increased demand from China and India, and the decline of the US dollar.
After the 2008 financial crisis, oil prices declined, reaching a low of $20’s per barrel in 2016 due to a global oversupply of oil. However, prices started to rise again in 2017 due to production cuts by OPEC and a strong global economy.
In 2018, oil prices exceeded $75 per barrel due to increased geopolitical tensions, supply cuts, and economic growth. However, prices fell again in late 2018 due to increasing concerns over a global economic slowdown and rising US oil production.
In 2020, the COVID-19 pandemic caused a global drop in demand for oil, leading to a steep decline in oil prices. The price of oil reached a low of negative $37 per barrel in April 2020 due to a surplus of oil and a lack of storage space.
Since 2020, oil prices have recovered somewhat, with prices hovering around $60 per barrel in 2021 due to the ongoing COVID-19 pandemic and increasing demand from China. However, prices are expected to remain volatile in the coming years due to factors such as geopolitical tensions, changes in global oil production, and economic conditions.
In recent years, the global oil market has been impacted significantly by COVID-19 disruptions, price wars between oil-producing nations and now the Russia / Ukraine war.
The output control deal made between the Organization of the Petroleum Exporting Countries (OPEC) and 11 of the world’s top oil producers expired in 2020. When production rose dramatically in April of that year after Russia’s decision not to approve further cuts proposed by Saudi Arabia, the de facto OPEC leader responded by offering its product at a discount and producing more oil. The top ten countries for oil production are dominated by the USA, Saudi Arabia, and Russia:
COUNTRY
United States
Saudia Arabia
Russia
Canada
China
Iraq
United Arab Emirates
Brazil
Iran
Kuwait
United States
Saudia Arabia
Russia
Canada
China
Iraq
United Arab Emirates
Brazil
Iran
Kuwait
BPD
18,875,000
10,835,000
10,778,000
5,558,000
4,993,000
4,149,000
3,786,000
3,689,000
3,458,000
2,717,000
18,875,000
10,835,000
10,778,000
5,558,000
4,993,000
4,149,000
3,786,000
3,689,000
3,458,000
2,717,000
In an oversupplied market suffering from a lack of demand, oil prices turned negative, shocking market participants. Finally, with some pressure from the US, Russia and OPEC finally came to an agreement to cut production by 9.7 million barrels per day, the single largest output decrease in history.
In 2021, oil demand returned as COVID-19 lockdowns eased worldwide, pushing prices higher. Now into 2022, Russia’s aggressive war against Ukraine has sent oil prices skyrocketing.
There are several factors contribute to the fluctuation in global oil prices, including:
Supply and demand dynamics
Changes in the balance between global oil supply and demand can have a significant impact on oil prices. Factors such as geopolitical tensions, natural disasters, and economic growth all affect oil supply and demand.
Geopolitical tensions
Tensions between oil-producing countries and other nations, as well as conflict in oil-producing regions, can disrupt oil supplies and lead to price spikes.
OPEC production cuts
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, have a significant impact on global oil prices through their decisions to cut or increase production. With oil prices and the economic outlook weakening, the group agreed in October 2022 to cut its production target by 2 million barrels per day from November 2022 until the end of 2023, which constitutes about 2% of world demand.
Dollar exchange rate
The value of the US dollar, which is used to trade oil on global markets, can also impact oil prices. A strong US dollar can make oil more expensive for buyers using other currencies, while a weaker US dollar can lower oil prices.
Natural disasters
Natural disasters such as hurricanes or typhoons can disrupt oil production and transportation, leading to temporary price spikes.
GEOPOLITICAL TENSIONS: A CLOSER LOOK
The ongoing conflict between Russia and Ukraine has had a significant impact on the oil prices globally. The conflict, which started in 2014, has resulted in trade sanctions and restrictions, causing a significant drop in oil prices. The effects of the conflict on oil prices are far-reaching and have a significant impact on the global economy.
The conflict between Russia and Ukraine started in 2014 after the Ukrainian government signed an agreement with the European Union (EU), which was seen as a threat to Russian interests. In response, Russia annexed Crimea, and pro-Russian separatists in eastern Ukraine declared independence from the Ukrainian government. The conflict escalated, leading to a war between the Ukrainian military and the pro-Russian separatists. The war has resulted in thousands of deaths and a humanitarian crisis in the region.
The United States and the EU imposed trade sanctions on Russia in response to the annexation of Crimea and the support of the pro-Russian separatists in Ukraine. The sanctions targeted key sectors of the Russian economy, including the energy sector, which is a significant source of revenue for Russia. The sanctions caused a decline in the Russian economy and resulted in a significant drop in the oil prices.
The conflict between Russia and Ukraine has had a significant impact on oil prices and resulted in a decline in the production and export of oil. Oil prices play a crucial role in the global economy, and a decline in prices can result in a recession. The decline in oil prices has affected the entire energy sector, including the exploration and production of oil, the refining and marketing of oil, and the transportation and distribution of oil, which had a profound effect on the economies of oil-producing countries, with the price of oil being a major source of revenue for these countries. This has resulted in a decrease in government revenue and a decline in the overall economic growth of oil-producing countries.
GLOBAL EFFECT OF OIL PRICE FLUCTUATION
It was evident time and time again that fluctuations in oil prices have a significant impact on consumers, as the price of oil is closely tied to the cost of many goods and services. When oil prices rise, the cost of transportation increases, which in turn leads to higher prices for goods that are transported, such as food, clothing, and electronics. This can result in inflation, which erodes the purchasing power of consumers. In specific, the effect of fluctuations in oil prices include:
Increased Prices of Gasoline
The primary effect of fluctuating oil prices is the increase in the cost of gasoline. As the cost of crude oil increases, the price of gasoline also increases. This means that consumers must pay a higher cost at the pump, thus increasing the cost of transportation.
Increased Prices of Other Products
Fluctuations in oil prices also affect the prices of other consumer goods as the cost of producing goods such as food, clothing, and consumer electronics increases due to the price of oil increase, which renders the cost of those products more expensive for consumers.
Reduced Consumer Confidence
Fluctuations in oil prices can affect consumer confidence as consumers may become uncertain about their ability to purchase goods and services due to their increased cost, which leads to a decrease in spending and negatively impacts the overall economy.
Increased Inflation
High oil prices lead to increased inflation as the cost of living becomes higher, making it more difficult for consumers to make ends meet.
Increased Cost of Energy
Higher prices for oil mean higher prices for heating oil and other forms of energy, increase costs for consumers who will be forced to pay more for electricity, heating, and cooling. This decreases the available cash consumers may have to spend on other vital costs of living, which effectively and negatively affects the overall economy and causes its slowdown.
JORDAN, A SUSTAINABLE STORY
The fluctuations in oil prices have a direct impact on the inflation rate in Jordan, as the country heavily relies on oil imports. A rise in oil prices affects the balance of payments due to the additional spend on oil imports, which negatively affects the overall economic growth.
A sudden increase or decrease in oil prices can significantly impact Jordan’s economic growth. High oil prices lead to inflation and reduce economic activity, while low oil prices result in lower government revenue triggering slower economic growth. Inflation effects can be detrimental as it increases the cost of transportation, energy, and other goods, which is particularly problematic for developing countries like Jordan where a large portion of the population live within limited means.
Jordan is fully dependent on importing oil from neighboring countries. Higher oil prices negatively affect Jordan’s trade balance and leads to a declining overall economic prosperity due to the increased energy prices as the country heavily relies on oil to generate electricity, and increased oil prices will undoubtedly affect households and businesses.
In addition to the above, higher oil prices have a direct impact on the cost of transportation, which such costs are passed to the end consumer whether it is through businesses or directly in the households through increased costs of electricity. Furthermore, Jordan agricultural production experiences a negative effect due to the increased cost of production which affects the overall competitiveness of the agricultural sector and decrease the trading and export activity of the Jordanian agricultural products.
The investment climate in Jordan is also affected by oil prices for investors are usually attracted to a country where the cost of doing business is reasonable. An increase in oil prices could add an un-necessary complication to the Jordanian investment climate and cause a loss of investments.
The negative effects of the increase in global oil prices will undoubtedly increase the hardships faced by the Jordanian population and potentially destabilize the country’s political environment due to the limited economic growth and the inability of the Jordanian population to cover the basic life needs.
JORDAN, ALL IS NOT LOST BUT TIME IS OF AN ESSENCE
In is undeniable that the global oil prices have a profound effect on the livelihood of the population in any country including Jordan. However, there is still time for the governments to react and implement certain measures to withstand the down effects of the increased global oil prices.
The Jordanian government can focus on developing other sectors such as tourism, agriculture, and technology to diversify the economy and reduce its reliance on oil imports.
The government should work to encourage energy efficiency and implement measures to reduce energy consumption, such as promoting the use of renewable energy sources and encouraging businesses to adopt energy-saving practices.
The government should negotiate with oil-producing countries to secure long-term, low-cost supplies of oil. Doing this instills a sense of comfort to the population and secures time for the government to implement other long-term strategies for diversifying Jordan’s economy.
The government can promote and encourage domestic production of goods by offering tax incentives to companies engaged the manufacturing industries.
The government should seriously consider reverting back to subsidizing the cost of fuel to reduce the impact of high oil prices on the average consumer and leaving more dispensable income in the hands of the population to spend on other products and services, thus increasing the economic activity in the country.