What determines the price of oil?

Oil is the lifeblood of the 21st-century world. Though many governments have tried to move away from it in the last couple of decades, oil remains king among the world’s energy sources, amounting to 31% of total energy usage in 2025. The liquid gold has an economy of its own, and the way oil prices flow can keep some countries afloat while sending others into an economic tailspin. But what decides which way the oil price winds will blow? 

Oil prices, like those of all goods, are affected by supply and demand. One key variable in the supply of oil is OPEC, the Organisation of Petroleum Exporting Countries. Founded in 1960, OPEC is an organisation of 12 member countries aiming to coordinate petroleum exporting policies of its members and stabilise the oil export market. OPEC functions as a cartel managing the supply of oil in global markets by setting oil production quotas. OPEC is not acting alone. Since 2016, OPEC+ has brought OPEC members together with major non-OPEC producers, most importantly Russia, to coordinate production adjustments. OPEC quotas matter: as OPEC members control most of the world’s oil reserves, those quotas affect the global supply of oil and hence put pressure on global oil prices. By coordinating production, OPEC seeks to balance supply and demand and promote stability in global oil markets, while securing revenues for its member states. OPEC’s influence comes less from controlling the majority of current production than from its enormous reserves and its ability to adjust production relatively quickly. 

OPEC doesn’t have a monopoly on prices, however. While OPEC holds the majority of global oil reserves, 65% of actual global crude oil production occurs outside OPEC as of 2024. The largest oil producer in the world, the United States, is not a member, and other large suppliers like Russia remain outside the organisation. These sizable suppliers can shift their own production to put pressure on global oil prices. Russia, for example, went into a price war with OPEC producer Saudi Arabia in March 2020. As oil demand cratered due to the rising COVID-19 pandemic, Russia rejected cutting oil production, partly because it feared surrendering market share to US shale producers as demand was falling. Saudi Arabia responded by dramatically increasing oil production to depress oil prices and reduce Russian profits, as Russian production costs are higher. Russia did the same, and the ensuing glut of oil caused oil prices to plunge by nearly 50%. 

These reserves are not infinite, however, and as these conflicts show no sign of slowing, the future looks bleak for global oil prices. 

Oil inventories also matter when production exceeds consumption: excess oil can be stored, cushioning prices; when supply falls below demand, inventories can be drawn down, temporarily preventing shortages from pushing prices even higher. Oil prices also respond to expectations: traders may bid prices up or down based on anticipated changes in supply, demand, or geopolitical risks before these changes occur.

Demand also matters. Industrial production and robust economic growth help increase the demand for oil, putting upward pressure on prices. Countries in the OECD – an international economic organisation that includes most developed economies in Europe along with others like the United States or Japan – consumed 46% of global oil demand in 2021. Rapidly growing non-OECD countries like India and China account for much of most of the global oil demand, especially due to their burgeoning energy-intensive manufacturing sectors along with their high populations. Transportation and seasonal changes also increase demand, for example, oil and electricity demand rises in hotter countries during the summer due to air conditioning. But demand can go the other way and push prices downwards: Brent crude oil prices plunged to $19.33 in April 2020, and the price of the front-month West Texas oil futures contract went negative as demand plummeted during the peak of the COVID-19 pandemic shutdowns. 

At present, oil supply and demand have been affected by severe geopolitical shocks. The war in Iran, the subsequent Iranian closure of the Strait of Hormuz and the US blockade on Iran meant that the Strait, which transmitted 20% of global oil supplies pre-war, had now become largely disconnected with the global market, creating what the International Energy Agency (IEA) termed the “largest supply disruption in the history of the global oil market” and causing oil prices to peak at above $120 per barrel (for Brent Crude). Additionally, Ukrainian drone strikes on Russian oil refineries caused cuts in oil production in both Russia and Kazakhstan. IEA member countries, including the United States, can release emergency oil stocks to help offset major supply disruptions. Some countries even reduced their demand for oil, with China reducing oil imports by around 40% compared to pre-Iran-war levels, although much of this decline reflects the use of domestic oil reserves rather than a comparable fall in consumption. These reserves are not infinite, however, and as these conflicts show no sign of slowing, the future looks bleak for global oil prices.