What Really Determines Oil Prices? It’s Not Oil Demand – It’s Politics

You likely learned in Economics 101 that the prices we pay for goods and services are directly related to supply and demand.

But what if that wasn’t the case? To take it further, what if the price of one of the most important products you use each day was affected by little more than the whims of others?

Believe it or not, that’s exactly the case when it comes to oil. In fact, oil demand is hardly a part of the equation at all in the grand scheme of things.

Keep reading to see how politics plays a direct part in the price of oil.

Where Does Oil Come From?

Before we go any further, let’s answer a common question which may explain some things: where does crude oil come from, anyway?

Largely, the Middle East. In fact, Saudi Arabia is currently the second largest supplier of oil to the United States.

What’s more, OPEC, a pact of oil-producing countries dedicated to petroleum product policies, says that 67.1% of OPEC oil reserves around the globe are located in the Middle East.

OPEC has a good bit of leverage in the market, as it can set, raise, or lower quotas and targets for production at will. This is where supply and demand come into play.

Why Oil’s Point of Origin Matters

The Middle East has long been a hotbed for conflict and warfare. Struggles over land date back for centuries.

As you might expect, when so much of the world’s oil production comes from an area so rife with trouble, things can get a little dicey as nations fight for land rich in oil.

Oil Prices and War: A Brief History

Control over the production of oil is one of the primary causes of war within the last century. It would seem that everyone is looking for ways to cut costs, especially when it comes to oil.

Take the controversial Iraq War, for instance. Before the war, Iraq’s oil production prohibited Western countries. It’s tragic to see that oil conflicts have such terrible repercussions which lead to devastating war stories.

In 2003, the United States announced its intent to enter Iraq to look for weapons of mass destruction, leading to a conflict that still isn’t completely fixed.

Since then, a shocking number of major Western oil companies have moved into Iraq and started privatized operations.

Public perception soon shifted as U.S. generals and officials began decrying the war as little more than a way to seize oil production. Gen. John Abizaid and Alan Greenspan both came out against the war, claiming that oil was a primary reason for the U.S.’s involvement.

The cost of oil and oil production were factors in the Gulf War, as well, as Iraq accused Kuwait of producing too much oil leading to tension.

Suffice to say, international conflict and the cost of oil are more or less intertwined. In fact, if you start paying attention to oil prices during times of conflict, you can see the effect in real time.

Petroleum and Politics: How Oil Demand and Politics Mingle

At this point, it’s hard to argue that there isn’t a correlation between politicslargely war — and oil demand.

Though some aspects of supply and demand still apply, your biggest predictor for how much you’ll pay at the pump is actually what political leaders are saying and doing, so be sure to pay attention so you can learn what to expect.

Be sure to check out our guide on creative ways to save money so you can save even more cash.

How Oil Demand and Politics Mingle

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