Oil, it provides gasoline for our cars, diesel for our trucks, and other materials we use every day for energy and manufacturing. It is also no surprise to many that the oil price is a very often-discussed topic. Whether oil is below $50 a barrel, or over $100, the cost of oil determines what we pay for everyday routines.
You or I can’t just go to the store and buy a barrel of oil. Oil producers on the other hand also don’t just put a price tag on their oil and hope a buyer comes along either. Oil is often traded at exchanges. These exchanges bring the buyers and sellers together and this mechanism of supply and demand is what will set the price at that exchange.
The exchange acts as an auction and will sell what the producers are offering at the price the bidders are willing to pay for oil at that moment. It could very well be that the producer doesn’t want to sell at the prices being offered because it cost them more to produce the oil, so they’d be taking a loss and decide not to sell. Often when this is the case, producers will store oil until the price is right.
On the other hand, when the price is high, many producers will want to sell their oil, and the buyers might not be willing to pay that price, because they can get the oil cheaper from another location and ship it to where they need it to be. In this case they won’t buy, and the producers will start offering lower prices to the exchange where the buyers can buy.
What ends up happening is a finely tuned balance between the buyers and the sellers all looking to have the black gold change hands. On the world market, this is what determines the price of oil, and you or I don’t have any say in it; but we can definitely feel it in our pockets.
