Oil is essential to the global economy and its price fluctuations can have far-reaching effects. It can affect economic growth, inflation expectations, and the balance of payment flows.
As with all commodities, the laws of supply and demand drive oil prices. When supply exceeds demand, the price falls; conversely, when demand exceeds supply, the price rises. Political events that disrupt the flow of oil and its products can also cause prices to spike. Examples include the Iranian revolution, Iran-Iraq War, Arab oil embargo, and the global economic crisis of 2007–2008. Technological innovations that increase oil production levels and decrease the cost of extraction, such as hydraulic fracturing (or fracking), can also have a direct impact on prices.
Lastly, market sentiment and risk perceptions can also influence oil prices. During the Covid-19 pandemic, for example, the number of new deaths per day, US economic policy uncertainty, and perceived volatility in the global equity market all had negative impacts on the price of WTI crude oil. In addition, a structural break and autoregressive distributed lag (ARDL) analysis revealed that the price of oil is likely to fall if consumers switch to alternative energy sources or increase equipment fuel efficiency in response to higher prices. However, this effect is likely to be short lived, as both of these actions require substantial lead time.