Oil price fluctuation
For many people, the most obvious impact of oil prices is the cost of gasoline. Higher prices mean a larger share of households’ budgets is spent on fuel, which makes it harder to afford other things they may want or need. Higher prices also make businesses that use fuel as a major input more expensive, such as airlines and companies that ship goods from place to place.
Other factors, like geopolitical events or severe weather, can also affect the price of oil. These can disrupt the flow of crude oil or petroleum products to market, which can increase uncertainty about future supply and demand and thus raise prices.
A more fundamental reason for volatility in oil prices is the low responsiveness, or inelasticity, of supply and demand to price signals in the short term. It takes a long time for producers to develop new supply sources or vary production, and consumers are slow to switch to other fuels or increase equipment fuel efficiency in response to higher prices. This inelasticity can necessitate large price changes to rebalance physical supply and demand.
Persistently low oil prices are also a concern for oil exporting countries, which often heavily subsidize their domestic energy industries. When the price of oil falls, they lose valuable revenue and must cut spending to balance their books. This can exacerbate the economic decline in the economy of oil-producing countries, which can have ripple effects on their regional neighbors, as well as the global economy at large.