Why Oil Prices Fluctuate

Posted by on Jun 9, 2016 in Financial Focus, News

Visual Capitalist put out a great piece this week on Why Oil Prices Fluctuate. The main reason they fluctuate is supply and demand. But this is not the only reason. Some other possible reasons the author summarized:

  • Weather
  • Oil spills
  • Renewable energy sources
  • Political instability
  • Growth
  • War
  • Embargo
  • Third-world countries moving to first-world standards
  • False information
  • Labor issues in the oil Industry
  • Currency fluctuations
  • Construction activity
  • Incorrect forecasts

All of these can lead to oil price fluctuations.  As we’ve seen oil prices rising recently, one starts to wonder how we can have such dramatic shifts in price, and this piece does a great job of explaining it.

What is not explained is why pundits have put out the concept that low oil prices is bad for our economy because oil companies don’t make as much. This message is flawed due to the fact that the consumer is king in the major economies (such as the US). US Consumers made up 92% of our economic growth over the past year. The savings at the gas pump is the equivalent of a major stimulus program for consumers.  Although bad for oil companies and some related industries, it is not generally a bad development for a consumer-based economy.

 
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 Chart Source: Haver and GSAM from January 1, 2015 to March 20, 2016. Private Consumption Share of Gross Domestic Product (GDP) are calculated using real levels of GDP, not nominal levels. Growth data is computed by looking at the change in current GDP levels from the past year. Past performance does not guarantee future results, which may vary.

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