Pricing Process of Oil

Pricing process of oil

Price is the equalizer which serves to ensure that supply of a given commodity continuously meets demand. In the event that demand exceeds the supply, then prices for that commodity would increase until either demand is diminished or new supplies are attracted so that equilibrium is attained. On the other hand, if supply surpasses demand, prices will plummet until the market is in balance.

The price of oil is, in essence, set in the international marketplace. It is of note that oil is traded extensively worldwide and it can be easily moved from one market to a different market using ships, barge or pipeline. As such, the market is global and the demand/supply balance determines the price for crude oil throughout the globe. This means if there is an oil shortage in a certain region of the globe, then prices within that market would increase thereby attracting suppliers from other markets until the demand and supply within that market balance (Cavallo, 2013). Conversely, in case there is a surplus within a certain part of the world and the price falls, purchasers would soon be attracted to that market. This is the main reason as to why prices of crude oil are the same worldwide. Prices differ just to reflect the quality variations between the different sorts of oil and the costs incurred in transporting crude oil to that particular market (Ramos & Veiga, 2013). It is noteworthy that the international nature of the crude oil market is essential in explaining the reason as to why major events in any one part of the globe affects prices of oil in all markets.

Besides all of the actual oil barrels which are traded, there is also another market which essentially trades in paper barrels. Oil is traded on paper basing upon a perceived economic value of oil; the actual exchange of oil does not happen (Alquist, Kilian & Vigfusson, 2011).Paper oil barrels are sold and bought in 2 key markets: on