The price of oil is heavily influenced by geopolitical factors due to the significant role that oil plays in global politics and the global economy. Here are a few key reasons why oil prices are influenced by geopolitics.
Supply Disruptions: geopolitical events such as wars, conflicts, and sanctions can disrupt oil production and supply. For example, conflicts in countries like Iraq, Libya, and Venezuela have led to disruptions in oil production, reducing global oil supply and causing prices to rise. OPEC and Non-OPEC Actions: The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including non-OPEC producers like Russia, have significant control over oil production levels. Geopolitical factors can influence their decisions on production quotas, which can impact global oil supply and prices.
Political Unrest and Instability, the political instability in oil-producing regions can lead to concerns about supply disruptions. For example, tensions in the Middle East or the Strait of Hormuz, a critical oil shipping route, can increase the risk premium on oil prices. Geopolitical Agreements and Alliances as international agreements and alliances can impact oil prices. For example, changes in U.S. foreign policy, such as sanctions on oil-producing countries or trade disputes, can affect global oil markets. Economic Growth and Trade such as trade disputes, can have an impact on global economic growth and trade patterns. Changes in economic growth rates and trade relationships can affect oil demand, which in turn influences oil prices.
It’s important to note that while geopolitics can significantly influence oil prices, other factors such as global supply and demand dynamics, market speculation, and weather conditions can also impact prices.
Why brent?
The term “Brent” refers to the naming convention used for a specific type of crude oil. The name originates from the brent oil field, an offshore oil field located in the North Sea. This field was discovered in 1971 and has played a significant role in oil production in the region.
Brent crude oil is a light, sweet crude oil that contains low sulfur content and is considered to be of high quality. Due to its favorable characteristics, Brent crude has become a global benchmark for pricing other types of crude oil.
The pricing of Brent crude is determined through a market-based system, where trading and settlement of contracts for future delivery occur. This pricing mechanism provides transparency and allows market participants to hedge against price fluctuations.
It’s worth noting that Brent is not the only benchmark for crude oil pricing. Other popular benchmarks include West Texas Intermediate (WTI) and Dubai crude. Each benchmark reflects the unique characteristics of the respective crude oil and serves as a reference point for global oil prices.
How new Energy sources can impact the oil price
The emergence and development of new energy sources are starting to have an impact on oil prices. Here are a few key ways in which new energy is affecting oil prices:
1. Increasing Demand for Clean Energy:
As the global push for clean energy intensifies, there is a shift in energy consumption away from fossil fuels like oil towards renewable energy sources such as solar, wind, and hydroelectric power. This can lead to a decrease in demand for oil, putting downward pressure on oil prices.
2. Technological Advancements in Energy Efficiency:
The advancements in energy-efficient technologies and practices are reducing the overall energy consumption, including oil. This can also contribute to a decrease in oil demand and put downward pressure on prices.
3. Electric Vehicles (EVs):
The increasing adoption of electric vehicles is expected to reduce the demand for gasoline and diesel fuels, which are derived from crude oil. As EVs become more popular and their charging infrastructure improves, demand for oil-based transportation fuels may decline, impacting oil prices.
4. Government Policies and Support:
Many governments are implementing policies and providing incentives to promote the use of clean and renewable energy sources. Such policies can further reduce the demand for oil and put downward pressure on oil prices.
5. Energy Transition Risks:
As the transition to new energy sources progresses, traditional oil companies may face risks related to stranded assets. This refers to the possibility of oil reserves becoming uneconomical or unusable due to the decrease in demand caused by the transition to clean energy. Such risks can affect the valuation and investment decisions of oil companies, which can indirectly impact oil prices.
It is important to note that, at present, new energy sources have not yet completely displaced oil as the primary energy source globally. The impact of new energy on oil prices varies depending on the pace of adoption, technological advancements, government policies, and other factors. Furthermore, oil continues to play a significant role in various industries, including transportation, petrochemicals, and aviation.