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An analysis by the Treasury Department estimated that the price of gasoline was between 13 and 31 cents per gallon lower in spring and summer 2022 than it would have been otherwise, following President Joe Biden’s decision to release 180 million barrels of crude oil into the market from the nation’s emergency reserves.

That decision was an attempt to make up for higher energy costs resulting from the Russia-Ukraine war.

This is one example of the back-and-forth that occurs in attempts to balance the cost of a barrel of oil in the market: events often that impact pricing, and policy responses aim to stabilize it.

Beyond war and releasing oil from emergency reserves, there are numerous other factors that can influence the cost of oil.

Factors influencing oil prices

The cost of oil is intertwined with social and economic events. When events occur on a large enough scale, the cost of oil often changes.

Anything with the potential to affect supply and demand also has the potential to impact oil prices. That means the economy, politics, social unrest, financial markets, and even natural disasters can all play a role.

Oil supply

Because the global oil market responds to supply and demand, oil-producing countries, including the US, have used their ability to adjust global oil supply when necessary.

The US emergency oil reserve is called the Strategic Petroleum Reserve (SPR), which holds an emergency supply of crude oil. As of July 2023, it held about 347 million barrels. The SPR is one tool the government can use to lower the cost of oil and its byproducts, like gasoline, by increasing supply in the market. Oil supply emergencies, geopolitical conflict, and Hurricane Katrina have all triggered SPR sales over the past three decades.

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Other countries have emergency reserves as well. In 2022, countries released 60 million barrels of oil into the market to combat high prices from Russia’s war with Ukraine. Because oil prices are determined on a global market scale, such actions from other countries also benefit the US.

While there are numerous ways supply can be impacted, the Organization of the Petroleum Exporting Countries (OPEC) has an outsized and ongoing impact on the market. OPEC members controlled about 72% of global crude oil reserves in 2021. As of 2023, they accounted for 40% of the world’s crude oil production and 60% of petroleum traded internationally.

The organization provides production targets for its members, but it can also pause production to adjust pricing. OPEC’s decisions about production and supply are reflected in global market prices due to the volume of oil its member countries produce.

Geopolitical factors

Geopolitical conflict, wars, and social unrest — especially when they occur near oil-producing areas — also have the capacity to change the cost of oil. The Arab Spring, civil war in Libya, and, more recently, the war between Russia and Ukraine all resulted in higher oil prices. When the market lost Libya’s oil exports in 2011, the cost of Brent crude oil increased by $15 a barrel in less than two weeks.

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About four months after Russia invaded Ukraine, the Brent crude oil spot price was $121, the highest inflation-adjusted price per barrel since 2014. Around the same time, in early 2022, COVID-19-related restrictions were newly lifted, leading to more economic activity, higher demand for oil, and lower inventory. While these other economic factors were at play, the invasion exacerbated supply issues and contributed to rising prices.

Financial markets

Futures contracts are also a part of oil pricing. Companies can purchase oil through an agreement called a futures contract. "Futures" are contracts between a buyer and a seller to complete a transaction at a determined point in the future for a particular commodity — in this case, oil.

Futures contracts are mutually beneficial agreements for buyers and sellers because they lock in a purchase price for the buyer. This is especially beneficial if the buyer predicts the cost of oil will increase in the future. Futures also guarantee a sale for the seller.

Market forces will continue to change the price of oil over time, but buyers with futures contracts are protected from those changes for the period of their contract. At the time of the transaction, what the buyer pays for oil may not reflect the current or “spot” price of oil.

Natural disasters

Markets may anticipate changes in oil prices related to social unrest and war. But natural disasters unexpectedly impact oil pricing if they damage or destroy equipment related to oil extraction and the refining process, or if they displace residents, thereby affecting the labor necessary for operations. Any one of these situations could lead to a sudden reduction in oil production and result in lower supply.

When Hurricane Katrina struck the Gulf Coast in 2005, oil production was reduced and refining capacity was damaged. As a result, supply was lower, and price per barrel rose from around $60 to more than $70 a barrel.

Who controls oil prices?

Oil price influences consist of individual consumer and business demand, human manipulations of the market through control of production and supply, and “force majeure” impacts to the market. These are events that are either unforeseen or beyond a single person’s control, like Hurricane Katrina or the civil war in Libya.

The cyclical effort to balance market pricing is a tug-of-war: when events disrupt the market, people respond with interventions intended to balance supply and demand.

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