How Are Oil Prices Determined?

Question: How Are Oil Prices Determined?

Answer: Commodity traders are responsible for oil prices by bidding on oil futures contracts. There are many factors they look at when developing the bids that create oil prices:

• Current supply in terms of output, especially the production quota set by OPEC.
• Oil reserves, including what is available in U.S. refineries and what is stored at the Strategic Petroleum Reserves.
• Oil demand, particularly from the U.S. (as estimated by the Energy Information Agency . During the summer, forecasts for travel from AAA are used to determine potential gasoline use. During the winter, weather forecasts are used to determine potential home heating oil use.

Of course, potential world crises in oil-producing countries can also dramatically increase oil prices. This happened in March 2011 when investors became concerned about unrest in Libya, Egypt and Tunisia. It also occurred in July 2006 when the Israel-Lebanon war raised fears of a potential threat of war with Iran. (Article updated March 14, 2011)