How Oil Prices Impact the Economy and You

Whether or not we realise it, most of us have felt the effects of fluctuating oil prices. There are some obvious consequences such as our monthly expenditure on petrol for our vehicles, but there are also some less obvious connections such as fluctuations in our investment portfolio.

This is why, if you plan to invest in stocks or commodities, buy a car, or even get a loan from a private money lender in Singapore, you should understand the connection between oil prices and the world economy. Armed with the right knowledge, you could save money, pay back your loan, and generally live a more comfortable life financially.

The major players controlling price fluctuations

To fully understand the ‘why’, we must first know the ‘who’. The two most influential entities in the world of oil prices are the Organization of the Petroleum Exporting Countries (OPEC) and the United States of America.

OPEC

As its name suggests, the OPEC is an association of nations that drill enough petroleum to be able to export some of it. The OPEC representatives meet regularly to discuss how much oil to produce based on the supply and demand equation at any given point in time. This in turn determines oil prices and, consequently, the revenue it generates.

Observers describe the OPEC as a ‘cartel’ because of the disproportionately large influence its decisions have on the world. For instance, the 1973-74 oil embargo imposed by OPEC caused the prices of oil to quadruple. More recently, the world is once again experiencing price hikes on the back of Russia’s invasion of Ukraine, thanks to the sanctions imposed on Russia, a major OPEC participant.

Just as these and other decisions cause oil shortages leading to soaring prices, decisions to increase output cause oil prices to drop.

The US

The United States produces its petroleum, but not enough of the right type to completely satisfy domestic demand. As the world’s largest economy, the country’s national drilling policies have repercussions beyond its borders.

President Biden’s decision to cancel the Keystone Pipeline almost immediately after the 2020 elections, for instance, had catastrophic effects on the US economy. Not only did gas prices shoot to 7-year peaks, but the costs of necessities relying on cross-country transportation also skyrocketed. As a result, US inflation in July 2021 was at its highest in 15 years.

These parameters have a trickle down effect on the rest of the world as well, including Singapore, for investors who trade in the American stock market.

The domino effect on other products and industries

While most people are familiar with petrol and diesel for road vehicles and kerosene for aircraft fuel, petroleum and its by-products are used in a much wider range of products and industries.

Plastics

Everything that’s made of plastic around you, from the keyboard and mouse to the fan and the molding in your car, comes from petroleum.

Agriculture

Fuel for farming vehicles such as tractors and harvesters aside, petroleum derivatives are also used to create lubricants for machine maintenance. They are essential to the production of ammonia, which is the critical component in fertilisers.

Cosmetics and pharmacy products

Surprisingly, the viscous black liquid that is crude oil, with its stinging smell, is the genesis of virtually all cosmetics and perfumes. Everything from ointments to the most common prescription and over-the-counter drugs is also made from petrochemicals.

Synthetic rubber

Today, the volume of synthetic rubber produced annually is double that of natural rubber. This synthetic alternative is used in hoses and cables for electrical products and vehicles, as well as belts for machinery because of its longevity.

This is just a small sample of the thousands of types of products that are affected by oil prices. A simple trip to the office of your local legal money lender would be impossible without petroleum products. This is how petroleum forms part of an international, interconnected economy. However, its outsized influence is a testament to how widely its by-products are used in everyday objects, as well as the world transportation network critical to the world economy.

By understanding who controls oil prices and which products and industries are affected by it, you can make more mindful investment decisions. And if you wish to avoid the risks associated with such investments, one of the easiest ways to get capital when you need it is to get a loan from a reliable money lending company in Singapore.

Speak to the R2D Credit financial experts for more advice on how to turn your loan into an asset.