Review of Issues Affecting the Price of Crude Oil

October 2010

Abstract

The crude oil industry is central to Canada and the world’s economy and its future.  The price of crude oil has traditionally been determined by supply and demand fundamentals1.  However, there are new emerging drivers of oil prices.  The oil market has become increasingly complex, with a variety of factors having an impact on oil prices. Oil price fluctuations reached unprecedented levels in 2008, when world crude oil prices swung wildly, from $147 per barrel in July, to $30 per barrel in December.  These crude oil price swings were reflected in the prices that consumers paid for gasoline, diesel and furnace oil2. Given the importance of oil to Canada and the world, governments, industry and the public have an interest in understanding why oil prices fluctuate.

A Review of Selected Issues Affecting the Price of Crude Oil starts by reviewing the importance of crude oil to Canada and to the world and Canada’s place as the world’s sixth largest crude oil producing country, and second largest crude oil reserves holder.   

The paper identifies the traditional drivers of oil prices including a review of prices over the 1970 - 2000 period.  Then, we examine the new, emerging factors which have impacted prices since 2000, such as the “financialization3” of crude oil markets, and concentration of crude oil production in National Oil Companies (NOCs).

The paper examines the economic impacts of oil price movements, and the outlook for crude oil prices, in both the short term (2010, 2011) and, on the basis of surveys of respected organizations, longer term (to 2030).

The paper’s conclusions note that emerging factors - such as the prevalence of NOCs and growth of institutional investment in oil commodity markets – now interact with the traditional fundamentals, such as severe weather events, OPEC production decisions, crude oil inventory levels and other factors, to affect oil prices.  The paper notes two opposing long-term views on oil prices.  Some groups believe that long-term oil prices could trend downwards with gains in energy efficiencies, weaker than expected oil demand, and falling production costs due to technological advancement. A second group believes that long-term oil prices could trend upwards, driven by resource depletion effects, scarcity concerns, and higher demand for crude oil, particularly from China and India.

However, the paper concludes that there is no consensus on the future of crude oil prices. Given the impossibility of predicting the future of all the factors that can influence crude oil prices, we conclude that crude oil prices will continue to be very difficult to accurately forecast.  However, on average, the reference cases shown in this report do show crude oil prices rising in the future.

TABLE OF CONTENTS

  1. The Importance of Crude Oil
  2. Traditional Factors Driving Oil Prices
  3. Crude Oil Prices 1970 – 2000
  4. Emerging Factors Driving Oil Prices
  5. Crude Oil Prices 2000 – 2010
    1. Overview
    2. Financialization of Oil Markets
    3. Recessionary and Recovery Period
  6. Impacts of Crude Oil Price Changes
  7. Short Term Outlook for Crude Oil Prices
  8. Long Term Outlook:  Oil Prices to 2030
  9. Conclusions
  10. Glossary
  11. Bibliography
  12. Footnotes

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