From your car’s petrol tank to the markets: the rules that dictate the price of crude oil

The recent geopolitical tensions in the Middle East have put the oil market back at the heart of the economic debate. Each time a headline is written about a new international conflict or the blocking of a maritime trade route, the price of crude oil rises almost immediately – and hits every citizen in the wallet. To truly understand why this happens, it is essential that we decipher the workings of this complex financial and logistical system, which goes far beyond the simple extraction of a natural resource. Oil is still the main driver of the global economy and its final price is set in a continuous market where geopolitics, financial expectations and the forces of supply and demand are perennially interwoven.

In the first instance, the price of “black gold” is determined by the balance between those who produce it and those who consume it. On the supply side, the Organization of the Petroleum Exporting Countries and their allies, collectively known as OPEC+ and led by Saudi Arabia and Russia, coordinate their extraction activities with a view to keeping prices at a certain level. The United States, which is the world’s largest oil producer thanks to its use of modern drilling technologies (including the notorious practice of fracking), acts as a counterweight to OPEC+. On the demand side, the market is shaped by the huge appetite of industrial powers such as China and India.

At the international level, we usually find references to two major standards: Brent, which is the main standard used in Europe, and the WTI, which is used in the United States. Although the two standards move in parallel to one another, their minor differences reflect variations in logistical costs (Brent is transported by ship) and quality (WTI is lighter and contains less sulphur). However, much of the volatility in oil prices is due to the geopolitical risk factor. A large part of the world’s oil supply is transported via critical waterways such as the Strait of Hormuz. If a conflict threatens to prevent oil tankers from leaving port, or sanctions are imposed on an oil-producing country, the market anticipates scarcity and prices surge immediately. These expectations are traded in the financial markets through futures contracts, where instead of physical barrels changing hands every day, purchase agreements are made months in advance. The players in these markets include (among others) airlines, who seek to guarantee their operating costs, and investors, who provide the system with liquidity. To mitigate such crises, countries have strategic emergency stockpiles and are able to release their reserves when necessary in order to offset a damaging surge in prices.

The impact of all of these fluctuations reaches far beyond the petrol pump and affects every area of the economy. Oil is essential for the manufacture of plastic, asphalt and fertiliser, and for the transportation of practically every type of cargo. When the price of oil goes up, companies inevitably incur higher costs, which in turn prompts a rise in general inflation. To tackle this increase in the cost of living, central banks are obliged to keep interest rates at restrictive levels, which makes financial products such as mortgages, loans, etc. more expensive and slows global economic growth.

Although, in the long term, the transition to renewable energies and the gradual process of electrification promise to impose a structural limit on this dependency, the reality of the situation demonstrates that our system remains strongly anchored to crude oil. Without a doubt, understanding how the oil market works is essential to gauging the financial health and direction of the international economy.

_{Diari d’Andorra el 15.04.26}