Market Dynamics: This situation reflects the complexities of global oil trade and pricing

Shailesh, a 22-year-old boy from a small village, overheard his father talking about oil one evening.

“Last year, oil was $80 per barrel. Now it’s $95!” his father said with concern.

Shailesh did not understand why the price had gone up so much. Curious, he asked his teacher at school.

His teacher smiled and explained, “When demand is high, prices rise. When supply is low, prices rise even more. 

For example, if a country produces 10 million barrels a day but needs 12 million, the shortage pushes prices up.”

A few days later, Shailesh heard on the news that a major oil-producing country had cut its supply by 2 million barrels. Almost immediately, prices jumped to $100 per barrel.

His father sighed, “Now everything will cost more – transport, food, gas... everything.”

That day, Shailesh realised how something happening far away could affect daily life in his village. A war stopping 1 million barrels or a new factory demanding 3 million more could shake the entire market.

In this blog, we will explore Shailesh’s journey – and the power of oil prices.

1. Geopolitical Events

Geopolitical events, such as wars or political tensions, can affect oil prices. When countries involved in oil production face conflicts, the oil supply may decrease, leading to higher prices.

Example: Mayank's Oil Price Changes

In this example, Mayank notices that oil prices increased by 25% due to a conflict in Country X. After the conflict was resolved, prices decreased by 13.33%. This shows how geopolitical events can cause oil price fluctuations.

2. Supply and Demand

Supply and demand are important ideas in economics. Supply is how much of something is available. Demand is how much people want it. When supply is high and demand is low, prices go down. When supply is low and demand is high, prices go up.

Example: Keshaw’s Ice Cream Shop

On Monday, Keshaw sold 30 cups at ₹50 each. On Tuesday, he increased the price to ₹60, and sales dropped to 20 cups. On Wednesday, he lowered the price to ₹40, and sales rose to 40 cups. This shows how price changes affect the number of items sold.

3. Economic Conditions

Economic conditions, such as inflation, interest rates, and economic growth, can influence oil prices. When the economy is strong, people and businesses use more oil, increasing demand and raising prices. Conversely, during economic downturns, demand decreases, leading to lower prices.

Example: Neeraj's Oil Price Changes

In January, Neeraj observed that oil prices were ₹80 per litre due to a strong economy. In February, inflation increased, causing prices to rise by 6.25% to ₹85 per litre. By March, an economic slowdown led to a decrease in demand, and prices fell by 11.76% to ₹75 per litre. This example shows how economic conditions can impact oil prices.

4. OPEC’s Role

OPEC (Organization of the Petroleum Exporting Countries) is a group of countries that produce a large part of the world’s oil. They work together to decide how much oil to produce and sell. By doing this, they can influence the price of oil in the world market.

When OPEC produces less oil, the supply decreases, and prices usually go up. When they produce more, the supply increases, and prices often go down.

This control helps OPEC keep oil prices stable and ensures that member countries earn steady money from oil sales.

Example: Piyush’s Oil Business

Let’s see how OPEC’s decisions affect a boy named Piyush, who sells oil.

In this table, when OPEC increases oil production, the price per barrel drops, and Piyush earns less profit. When OPEC decreases production, the price rises, and Piyush earns more. This shows how OPEC’s actions can directly impact sellers like Piyush.

5. Financial Market

A financial market is a place where people and companies buy and sell things like stocks, bonds, and currencies. These markets help businesses get money to grow and allow people to invest their savings. They also help set prices for goods and services. Examples of financial markets include the stock market, bond market, and currency market.

Example: Adarsh’s Investment Journey

Let’s see how Adarsh, a young investor, uses the financial market to grow his money.

In this table, Adarsh starts with ₹10,000. Each year, his investment grows by a certain percentage. After 3 years, his investment has increased to ₹11,914. This shows how financial markets can help people grow their money over time.

Conclusion

Oil prices change due to many reasons, like wars, supply and demand, the economy, and OPEC’s decisions. When supply is low or demand is high, prices rise. Geopolitical events and economic conditions also play a big role. OPEC controls the oil supply to keep prices stable. Financial markets help people invest and grow money. Understanding these factors helps us see why oil prices go up and down. It is all about balance in the market.

FAQs

1. Why do oil prices change?

Oil prices change due to supply, demand, wars, and economic conditions.

2. How does OPEC affect oil prices?

OPEC controls oil supply – less supply raises prices, more supply lowers them.

3. Can financial markets impact oil prices?

Yes, trading and investments in markets can influence oil prices.

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