A Well Oiled Money Machine

Crude oil prices rose above $113 a barrel - Just a few years ago, it was at an all-time high of $50 a barrel!
But how does this affect us all?

What is Crude Oil?

Crude oil is the black stuff that comes out of the ground. It is then extracted and refined to make petroleum, other fuel oils, insecticides and petrochemicals such as plastics, synthetic fibres, detergents and chemical fertilisers - and, amazingly, even perfumes!

Why Are Prices So High?

Like all things in life, the price depends on supply and demand, and demand has been growing as more and more people want it - especially in China and America.

The short-term supply has been disrupted by problems in large oil producing countries such as Iraq, Saudi Arabia, Venezuela and Nigeria.

The increasing demand and restrictive supply has therefore caused oil prices to sky rocket.

So What?!

The price of oil fluctuates daily, but most of the time the oil companies don’t pass the cost onto us. However, with the current big rises, they are left with no choice but to charge us more for goods such as petrol. This means we’ll have to spend more each time the car is used... and this will result in less money for luxuries! How about when you go abroad on holiday? Planes consume a lot of fuel. On average, between 15-20% of an airline’s total cost goes on fuel. In August, some of the major airlines increased ticket prices to cover increased fuel prices. So, now your holidays become more expensive.

Similarly, many companies need transportation, and use it on a much larger scale than we all do. Think about the many trucks you drive past on the motorway, and the cargo planes at the airport... Increased oil prices means that the cost of getting goods to our homes has increased.

Then there’s electricity. We all use it - every day! Think about the power stations that consume fuel, and all the factories that need power...

What Next???

There is a society of 11 major oil exporting countries called the Organisation Of Petroleum Exporting Countries (OPEC). They have decided to increase oil production in an attempt to lower prices.

However, we all know that there is only a limited supply of the ‘black stuff’, and as it gets more expensive, more countries and governments will look at other sources like wind and solar power, which are not only unlimited, but also good for the environment.

By Julian Warburton, Investment Banker

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