Just the Facts: Oil and Natural Gas Prices – Global Commodities/Global Price Influences

As the northern hemisphere heads into the winter heating months – as well as a holiday season with a pent-up demand for travel – families and businesses are experiencing an uptick in prices for oil, gasoline and natural gas. These fuels have already increased in price in the United States, with even greater sticker shock expected in other parts of the world.

The fact is that oil and natural gas are global commodities, and the cost for those products is driven by similar global factors extending far beyond the efforts of producers to exploring for and develop those products. Here’s more:

One of the most significant factors in determining global oil supply is the levels of production established by the Organization of the Petroleum

Exporting Countries (OPEC), which sets production targets for its members. At the end of 2018, OPEC members controlled about 72% of total world proved oil reserves, and accounted for 41% of total world crude oil production. While the 15 OPEC countries have often acted to coordinate

production since the bloc was established in 1960, individual members sometimes act independently to increase levels. The influence of OPEC’s actions on global supply cannot be overstated, however..

A second broad factor impacting oil supply is the geopolitical events and severe weather that can create uncertainty about future supply or demand and lead to higher volatility in prices. The COVID pandemic of 2020 is a significant recent example of a global event that first disrupted demand, followed by a more recent delay in increasing supply. Producers around the world took action to stem financial losses in early 2020 when total miles driven nosedived by reducing

 production, which hit independent producers particularly hard. As demand for oil has increased, the inelasticity of oil production – tied to the time and capital-intensive process of drilling new wells and bringing additional supplies to market – translates into the short-term volatility in prices being experienced now.

While the U.S. has dramatically increased its production in the past decade, other parts of the world receive oil from countries subject to

political upheaval or regions that have faced oil production disruptions because of political events. Venezuela, Libya and countries in the Middle East are examples of nations that have experienced volatility impacting oil production.

Finally, weather can have a significant role in the supply of crude oil. Hurricanes Ida and Nicholas caused refinery problems along the U.S. Gulf Coast in 2021, and unusual cold weather in West Texas in February 2021 disrupted production in the Permian Basin. Hurricanes in the Gulf of Mexico can affect oil production and refinery operations in the Gulf region.