Kitchen Table Economics

Why do oil prices fluctuate?

The pandemic has caused oil prices to fluctuate greatly. Shockingly, at one point it decreased so much in value that the cost per barrel actually went negative for the first time in history. While this only lasted for a little while, it showed just how unpredictable the cost of oil can be–especially during a global crisis. 

But what causes the price of oil to fluctuate? Especially to such extremes.

Just like any other good or service, price is dependent on supply and demand. In this case, demand–or how much a consumer desires a good or service–has declined. 

The outbreak of the coronavirus has left businesses closed and Americans restricted to their homes. As a result, cars aren’t on the road and planes aren’t flying. Because of the surplus of oil, we saw this historic price drop. Demand for oil was so low that prices per barrel actually went negative for a short time. Oil producers were paying people to take the oil off of their hands.

But this price cut did not trickle down to the gas pump because these producers are selling crude oil–which is raw material that refineries use to make gasoline, jet fuel and other products. Moreover, gas companies, like Shell or Exxon still have to pay to have the oil refined and transported. These companies also employ thousands of people and they need to be able to pay their salaries.

As the crisis continues and limits travel and transportation of goods, oil prices are expected to continue to fluctuate. As with nearly all aspects of the economy, oil companies are adjusting business models during this time to ensure they are able to stay afloat.