Oil, oil, oil. So many of our daily activities rely on oil; it provides us with fuel to run our cars, provides electricity to heat our homes, cook our food and so much more. Oil is a fossil fuel, therefore it is non-renewable and also produces greenhouse gases when burnt, which contribute to climate change. Despite this, economies continue to demand more and more oil. In this article I will discuss the factors and events (such as the Russia-Ukraine war) that dictate the demand for oil and analyse the main causes for the increases and decreases in the demand for oil.
Factor Demand
Factor demand is the demand side of the factor market, between the factor price and the quantity demanded of a factor. In general, a lower price of oil causes an increase in the quantity demanded, while a higher price has the opposite effect. Furthermore, if there is less oil available and this is the case as we are running out, the prices will increase as it is a scarce resource so it is harder to get. The supply and demand effect is how much is available and how much people want it. For example, in 2014 the oil market crashed as producers pumped more than the world could consume then resulting in the rise of oil prices.
The more economic growth the more the demand for oil, for example in 2008 when the recession hit and there was a drop in economic activity oil prices significantly decreased from $145 per barrel at the beginning of the year to $40 per barrel by the end of the year.
(Ref tradingeconomics.com)
Alternative energy sources
Good-value alternative energy sources such as wind, nuclear or solar would decrease the oil demand. However, this depends on constant supply and competitive pricing. For example, solar energy work extremely well in countries that are hot such as India. As oil prices are said to increase, decreasing the use of this non-renewable by switching to solar energy will not only be more cost-effective and sustainable but also help them reach their COP26 target of reducing emissions to 45% by 2030.
Geopolitics
If supply is determined by the large oil-producing countries if there’s tension in oil-producing countries the supply of oil could be affected which would affect the price creating instability for not only the countries importing but also exporting.
Recently we have seen a key example of how geopolitics has affected oil demand from the war between Russia and Ukraine. Russia is one of the largest exporters of oil. Crude oil accounts for $123 billion of its export revenue and $66.2 billion comes from petrol and diesel into the country’s economy. However, because of Russia’s war on Ukraine, Russia has faced major sanctions. Many countries including the UK have stopped buying oil from Russia. As most of Russia’s economic growth is dependent on these exports it has a significant negative impact on their economy. These sanctions have been placed on Russia as they have been posing an ongoing threat to peace and security.
However, in response to the fact that many countries have stopped importing oil from Russia, Russia has decreased its oil prices to encourage people to buy from them. As a result, China and India which have not chosen a side of either of these countries in the war Russia are importing their oil at a reduced price which is making it a better value for money. Therefore, in these countries, the demand is increasing as they have been supplied with it from Russia however other countries are facing shortages of oil and have to pay a higher price for it as there is less supply of it.
Value of currency
Oil is being charged in dollars therefore a move in foreign exchange affects oil prices thus impacting demand. A stronger pound pushes down the oil price and a lower pound increases the oil price.
A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil and when the dollar is weak, the price of oil is higher in dollar terms.
In the current economic climate, the strength of the dollar is increasing, and recently it’s been at a record high compared to the pound therefore this would result in more expensive oil. The United States has historically been a net importer of oil. Rising oil prices cause the United States trade balance deficit to rise as more dollars are needed to be sent abroad.
Increasing population and incomes
The world’s population is increasing exponentially. As a result, this means there is increased demand for cars to accommodate people. Therefore this creates an increase in the demand for oil from petrol and diesel.
Increasing incomes mean that people spend more therefore they are using more electricity as they have more disposable income. In addition, climate change means colder winters so more energy is used to heat homes which increases the oil demand.
As a result, oil plays a massive role in our current society and we significantly rely on oil every day in our lives. Factors discussed such as alternative resources, and the value of currency determine the demand for oil. Geopolitics plays a major role in the supply of oil we get as well as the price as we have seen in the Russia-Ukraine war. Increasing population and incomes influence the demand for oil therefore all these factors discussed in this article influence the demand for oil.
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