What does it mean when the oil price jumps?

What does it mean when the oil price jumps?
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Few of us pay much attention to the highs and lows of crude oil prices, but they can have a knock-on effect on the money in our pocket. Here’s how and why we might feel the pinch when the oil price rises.

What happens when the oil price rises?

When oil prices rise, as they have recently, it’s good news for producers and exporters because it obviously means they get more money per barrel of oil.

In contrast, rising oil prices are anything but a barrel of laughs for consumers like us. That’s because high oil prices can mean:

  • Higher costs of fuel for cars and homes
  • Products cost more because it’s likely to cost more to transport them (leading to overall inflation)
  • Slower economic growth as businesses reduce investment

Also, remember that oil is used to make all sorts of items we take for granted. So, whether or not you’re a direct oil consumer (through your car or an oil-fired home), it’s more than likely to have an impact on your purse. 

For example, manufacturers need oil (oil derivatives to be exact) to make plastic. And despite the drive to cut plastic use, more than 270 million tonnes of it are produced every year. 

Plus, let’s not forget clothes – synthetic clothes specifically. According to Greenpeace, nearly 70 million barrels of oil are used every year to make polyester. It also happens to be the most commonly used material to make clothes.

Add in the fact that we buy more clothes in the UK than anywhere else in Europe and suddenly, it’s easy to see how the rising price of oil might affect us. 

Why does the oil price fluctuate?

Like most things, it ultimately comes down to a number of reasons. For instance:

OPEC

The acronym stands for Organisation of Petroleum Exporting Countries. The group is made up of 13 oil-producing countries including Saudi Arabia, Kuwait, and the UAE. 

OPEC can influence the price of oil through production. It’s not quite price-fixing, rather it’s about adjusting the amount they make to ensure they meet demand, which in turn affects the overall cost.

Supply and demand

Like most commodities, the oil price also depends on how much of it is wanted. More demand means higher costs with the opposite also being true. This explains one of the reasons why oil prices crashed in 2020 – it was partly down to the pandemic and the huge fall in demand. 

Natural disasters

Disasters can cause supply shock. In other words, they can cause an increase or decrease in the supply of something (in this case, oil). In many cases, natural disasters cause the price to rise but some (like the pandemic) cause it to tumble instead.

Politics

Similarly, oil prices are affected by political instability. If there’s a threat of unrest, this can lead to higher prices. Stability, on the other hand, ensures reliability, which can mean steady prices (or even lead to lower costs).

Is a rising oil price always a bad thing?

This really depends on your outlook.

If your main concern is the immediate or short-term effect on the value of your money, then there are very few reasons to be happy.

But, rising oil prices aren’t always doom and gloom when it comes to the long term. High or constantly rising prices simply means the industry has an incentive to look for alternatives which could mean investing in more renewables.

It can also mean that we, as consumers, change our habits (like buying fewer clothes and cutting our use of plastics), both of which can encourage environmental sustainability.  

If you’re an investor, rising oil prices can be worth celebrating, especially if you’ve got shares in energy firms or the rise buoys the stock market overall. 

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